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Saudi: Construction sector poses risk to banks

Nonperforming loans to rise to 2.5% of gross loans in 2017 as construction sector continues to face mounting challenges

The Saudi construction sector has been adversely affected by slowing economic activity, stemming from a lower oil prices environment.
The Saudi construction sector has been adversely affected by slowing economic activity, stemming from a lower oil prices environment.

As the Saudi construction sector continues to faces several challenges, non-performing loans (NPLs) keep rising, bundled with higher provisioning costs for the country's banks, said a report published by Moody's Investors Service.

"The Saudi construction sector has been negatively affected over the last two years by slowing economic activity and fiscal consolidation measures, stemming from a lower oil prices environment.

“We expect the pressures to continue as the Saudi government aims to reduce its large fiscal deficit," said Olivier Panis, vice president - senior credit officer, at Moody's.

"As a result, the building and construction sector will likely contribute materially to the increase in NPLs at Saudi banks – we expect NPLs to rise to around 2.5% of gross loans in 2017, from around 1.5% estimated as of June 2016."

Saudi banks' exposure to the building and construction sector increased by 19.7% year-on-year as of June 2016.

This is graciously above the 8.9% increase in total bank credit over the same period and has contributed to a material increase in the sector's indebtedness.

"The building and construction sector in [the country] is already the main contributor to NPL formation at Saudi banks over the past five years and we expect this will remain the case in the coming quarters," explained Panis.

"This is indicated by the increasing proportion of NPLs in this segment, accounting for $1.09bn (SAR4.1 bn) or 27% of system NPLs as of 2015, up from $510mn (SAR1.9bn), and a number of leading indicators of asset-risk trends monitored by Moody's point to rising pressures that will stem from the construction sector in next 18 months."

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Construction Week - Issue 729
Feb 14, 2019