Saudi rating to be judged on ‘reform progress’ not oil price warns Moody’s

Higher oil revenues may persuade GCC countries to slow down economic diversification programs and non-oil sector development. (Shutterstock)
Updated 16 May 2018
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Saudi rating to be judged on ‘reform progress’ not oil price warns Moody’s

  • “A simple reversion to oil price strength” will not result in an automatic strengthening of Saudi Arabia’s or any other GCC state’s sovereign ratings
  • Development of non-oil economies increasingly important when assessing sovereign credit quality, agencies caution

LONDON: Saudi Arabia’s future sovereign credit rating will be judged on the success of its reform program rather than its oil revenues, rating agency Moody’s has told Arab News.
The global credit rating agency’s Managing Director of Global Sovereign Ratings, Alastair Wilson, said he attached importance to institutional determination to implement change and would also look at efforts made to diversify the economy to make it less reliant on fossil fuels.
He said “a simple reversion to oil price strength” would not result in an automatic strengthening of Saudi Arabia’s or any other GCC state’s sovereign ratings, “hence this was a wake-up call and the authorities recognized this.”
“In other words, structural weakness … based on hydrocarbon dependence needs to be corrected. That’s not going to go away.”
The successful implementation of the Kingdom’s plans over the next 10-12 years would be “challenging” but by no means impossible, he said.
Wilson said he was expecting “some success” over time, but no one anticipated “transformation overnight.”
Moody’s would take into account a number of factors before assigning a revised rating for KSA, he said. These would include the success of efforts to diversify revenue streams in order to insulate the government from “further oil price shocks.”
There were four cornerstones to credit ratings, he said — “accounts’ strength, institutional strength, fiscal strength and the ability to withstand exposure to shocks.”
“Institutional strength is linked to effective implementation of policies, the way policy reforms are articulated, and the attainment of stated objectives. All this, we will feed through our analysis … to help us to assess institutional fortitude.”
He explained that Moody’s wasn’t necessarily looking at metrics based on quantity, so there would be an element of judgment linked to quality (of institutional oversight) in the short to medium term.
“Over time we will see the benefits of reforms that the governments expect to see. Perhaps we will get higher growth because we will get higher growth in the non-oil economy.”
Wilson said an important indicator of a more resilient fiscal position was the non-oil balance sheet. “The non-oil fiscal deficit in most of these (GCC) countries is very high. We expect to see this coming down. We would expect to see lower volatility in economic growth over a period of time, say during a five, 10 or 15-year period.”
Over the next few years Moody’s would deliver “essentially a qualitative judgment” on reform efficacy, said Wilson. Although the oil price would be largely ignored, he agreed that a high price could buy time for GCC governments.
But he warned: “The supply and demand drivers in the market are not a great deal different from where they were a year or so ago… Yes, oil could go to $100 per barrel, but we don’t think that’s sustainable …. we think GCC countries have learnt from the oil price shock that what has been happening is structural in nature. The oil price can alleviate pressure, but is not central to our analysis,” he said.
David Staples, managing director and head of emerging EMEA corporates, said at a London emerging market forum that GCC governments had been clear about what they wanted to achieve, so “in a way we are measuring them against their own (stated) goals.”
Rehan Akbar, vice president of Middle East and Turkey corporates for Moody’s, said at the forum that there had been an acceleration of debt issuance in the past couple of years. Growth opportunities for businesses in the GCC were less than average, he said. Scope for businesses to grow organically were slightly subdued as new taxes and the withdrawal of subsidies had constrained consumption.
“We will probably see more cost control, and more M&A both in the region and outside,” said Akbar.
Earlier this month, Moody’s said in its annual credit analysis report on Saudi Arabia that the Kingdom’s (A1 stable) credit strengths included a strong fiscal position, substantial external liquidity buffers, a large stock of proved oil reserves combined with low extraction costs, and prudent financial system regulation.
“The stable outlook reflects our view that risks to Saudi Arabia’s credit profile are broadly balanced. The government’s reform program, including the plans to balance the fiscal budget by 2023, could over time offer a route back to a higher rating level,” said Moody’s.


INTERVIEW: SABB Managing Director David Dew steering through historic transaction in Saudi banking

Updated 21 October 2018
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INTERVIEW: SABB Managing Director David Dew steering through historic transaction in Saudi banking

DUBAI: David Dew has been working in banking in the Middle East and other emerging markets for 40 years, and you might think he has seen it all. But the merger between SABB and Alawwal in Saudi Arabia — which he is steering through to completion next year — is a career achievement for him.
“I think it’s a clear case of a win-win situation, and all our stakeholders will get benefit from it. It’s a genuinely exciting landmark transaction, and a significant transformation for the Kingdom,” he said.
It is a historic transaction, Dew explains. “It is the third biggest banking merger in the history of the region — the other two were in the UAE with significant government ownership — so SABB-Alawwal is also the biggest private banking merger for 20 years. It’s the first since the Capital Market Authority (CMA) was formed and the first since the new takeover rules came in.”
The merger will create the third biggest bank in the Kingdom by assets, loans and deposits, and — perhaps more significant in the current financial environment — forge a bank that is unashamedly international in its outlook. The transaction has its origins in the different imperatives of foreign banks operating in the Kingdom. Saudi Arabia has been identified as a global growth market by HSBC, which holds 40 percent of SABB — full name the Saudi British Bank.
Alawwal — the “first bank” in Arabic, reflecting its long heritage in the Kingdom — was dominated by a consortium of foreign banking interests, notably cash-strapped RBS (Royal Bank of Scotland) of Britain. RBS and its consortium partners — from Spain and Holland — wanted to reduce their overseas footprint. Getting out of Alawwal was a logical move from that perspective.

RBS and the Spanish bank Santander — which would each have about 4 percent of the enlarged company — have undertaken not to sell their shares for six months after completion.

The foreigners’ different strategic interests might have been the original spark for the merger, but Dew firmly believes it is in the best interests of the Saudi banking business, and bank customers. “Our first stakeholder is the Kingdom, and the merger is a great example of why and how Vision 2030 is actually working. It’s showing that Saudi Arabia is open for business. An important part of the Vision plan is the financial sector development program, and this merger shows it is working.
“The idea is to grow and develop capital markets, and this will help the Kingdom do that. It’s the kind of thing that just might not have happened even a few years ago.”
The next set of stakeholders he is working to satisfy is the regulatory establishment. The deal has been quite a long time in gestation, and much of that time has been taken up in getting it just right from a regulatory standpoint. “It’s taken a bit longer than you might have expected, but the regulators have been with us all the way — the CMA, the Saudi Arabian Monetary Authority, and the Ministry of Finance. All good things take time, and it is more important to do it right than to do it quick,” he said.
The next key group of stakeholders are the shareholders on both sides. In addition to HSBC and the RBS consortium, there are big investors in both banks in the shape of the Olayan conglomerate, and the government agency the General Organization for Social Insurance. Both have recused themselves from involvement in the merger negotiations. But both boards have recommended the merger terms.
“We’ve explained the business rationale and made a compelling case to them that the merger creates value. There will be a circular from both parties to all shareholders, we hope, by the end of the year.”
The next stakeholders on the list are the customers. “I know it’s a cliche that the customers are all important, but it’s true, and they will see real benefits,” Dew said.

(Illustration by Luis Grañena)


Comprising as much as 75 percent of the new bank’s business, the corporate sector will be crucial. “It will be the leading corporate bank by lending, and will offer other products, too, for example trade finance. It will also be the leading cash management business, and a significant foreign exchange provider.
“I think it will occupy a powerful corporate position and overall will be a bellwether for the underlying economy, so it will be followed closely by anybody interested in the Kingdom’s business,” Dew explained. With a market capitalization of about SR65 billion ($17.33 billion) and a sizeable free float on the Tadawul, it will be valuable proxy for investment in the modernizing Kingdom.
The new bank will also use its connection with HSBC’s powerful investment banking operation in Saudi Arabia to help satisfy customers’ needs in that segment.
In the retail sector, it will never be as big as NCB or Al Rajhi, market leaders with more than 50 percent of the retail market between them. But with about 10 percent of the Kingdom’s retail market, Dew feels it will be approaching the “tipping point” at which it becomes a serious player.
“The home loans market is critical. We estimate we’ll have 16 percent of that market, which is vitally important to the changes that are happening in the Kingdom,” he said. It will also have around 20 percent of the Saudi credit card market, he estimated.
“We will redouble our efforts to offer a good SME (small and medium-sized enterprises) proposition. SABB has not done enough in this sector, but we will do more, and the ability to do it will be enhanced by the merger,” he added.
“For corporate customers, we will be able to offer the biggest balance sheet and underwriting capability, which adds up to more ‘muscle’ for corporate clients. For retail customers, we will offer additional scale and focus, especially on the digital side. This is the future for the retail banking business, and we will build on Alawwal’s strengths here. They are pretty good in digital already. They have punched above their weight,” Dew said.
The final group of stakeholders are the employees. “Again it is trite to say ‘We are nothing without our people,’ but I happen to believe it. We have promised and we mean it, that there will be no involuntary redundancies. That does not mean there will be no losses through attrition. People come and go all the time, so that is only natural,” Dew said.
The new bank will have 4,800 employees, more than 90 percent of them Saudi citizens and 20 percent women. Its new chairperson will be Lubna Olayan, head of the eponymous conglomerate and one of the leading business figures in the Kingdom. “She has a track record in business, leadership expertise and international connectivity. To have somebody like that as chair of the new bank is an incredibly powerful statement. She will also be the first female chair of a listed Saudi company,” said Dew, who will be managing director of the new entity.
The bank will start operating in what Dew sees as an improving economic and financial environment in the Kingdom, with the long-promised privatization and initial public offering program materializing. “Two years ago, growth and bank lending were falling. In 2018 there has been a modest but significant improvement, and I do believe next year is going to show further improvement.”
On the geopolitical background, always a big factor in the business climate in the region, he brings a historical perspective to bear.
“When I came here 40 years ago, Israel-Palestine was the big issue. Since then, the region has become even more complicated and volatile. But business has navigated through these problems and I’m confident it will do so again. It’s all about having strong foundations,” he said.