samaSaudi Arabian Monetary AuthorityNewsProblem Debt Management in a Reform Environment: Risks to Growth and the Role of the Regulator
Problem Debt Management in a Reform Environment: Risks to Growth and the Role of the Regulator
12/09/2019 12:00 AM

Keynote Speech by H.E Dr. Fahad Alshathri, Deputy Governor for Supervision- Saudi Arabian Monetary Authority.


Opening Remarks

Distinguished guests, ladies and gentlemen, I am pleased to join you today for the 2nd Annual Corporate Restructuring Summit. I would like to thank Middle East Global Advisors and Abu Dhabi Global Market– for organizing this timely gathering of high-profile experts from all over the world.

Today's forum underscores the region’s importance as one of the fast-growing financial hub in the world. This forum, and its organizers, also reflects the diversity of the region’s financial sector. In my speech, I intend to offer some quick thoughts on the following 4 points;

  1. A brief overview of reforms agenda in the Kingdom of Saudi Arabia and how this has improved the ease of doing business in the Kingdom;
  2. Asset Quality trends, challenges and outlook for the Kingdom of Saudi Arabia;
  3. The need for regulators to proactively manage problem debt in a systematic, proactive and focused approach
  4. SAMA’s recent initiatives to ensure that appropriate support is provided by the banking sector to Micro, Small and Medium Enterprises and corporate businesses in distress.


Ladies and Gentlemen, The Kingdom of Saudi Arabia has made a lot of progress in opening up the Saudi economy for more business in line with the grand reforms plan of Vision 2030 launched in 2016 under the leadership of the Custodian of the Two Holy Mosques King Salman bin Abdulaziz and HRH Crown Prince Mohamed bin Salman. Vision 2030, the National Transformation Plan and the 13 vision realization programs have set the tone for important changes in the country, with a clear plan to develop the investment environment in order to facilitate the operations of local and foreign businesses.

Because of these reforms, Saudi Arabia has improved its 2019 Ease of Doing Business score by 1.62 percent from last year to rank 92nd among 190 economies, according to the latest annual ranking by the World Bank. The Kingdom’s continuous upward mobility in international competitiveness and ease-of-doing-business also means it is now attracting more investments, with FDI inflows increasing by 127% in 2018 and the number of new companies entering Saudi Arabia rising 70% in the first quarter of 2019.

Ladies and Gentlemen, overall, the Saudi economy is ticking along reasonably well. The Saudi Arabian economy registered a 2.4 percent growth last year following a contraction in 2017. This recovery was mainly attributed to the oil sector, which grew by 3.13 percent. The private sector grew by 1.9 percent in 2018. Inflation was higher during 2018 at 2.5 percent mainly due to the introduction of several fiscal measures affecting energy prices and the introduction of Value Added Tax. The fiscal stance continued to improve as the budget deficit decreased to 4.6 percent in 2018 compared to the 9.3 percent in the previous year as the government revenues increased significantly by 30 percent during this period. The Saudi economy is expected to pick up further during 2019, given the expansionary fiscal policy that is currently in place. Having said that, there are always risks to the economic growth prospects of any country. The downside risks for the Saudi economy is likely to come from any global economic slowdown and its potential impact on the global oil market. We are concerned about the growing U.S.-China trade tensions and the impact any possible slowing in the Chinese and European economies would have on global growth in the near term.

Ladies and Gentlemen, the ongoing economic reform process in the Kingdom envisages a number of structural changes for the Saudi economy. We are seeing the reform process also bearing fruits in the banking sector with a greater consumer sector lending, especially mortgage lending where the currently small market is expected to double in size in the next few years. Under the Housing Program, the Kingdom targets an increase in home ownership from 50% in 2016 to 60% by 2020, with an emphasis on greater mortgage lending. The most recent figures indicate a growth of 168% in mortgage loans provided by banks and 79% increase in mortgage loans provided by finance companies. Furthermore, the SAR 105 billion MSMEs loans provided by banks now represents a growing proportion of 5.9% of total banks loans portfolio.  The Finance Companies have also lent a total of 8.1 billion Riyal to the MSMEs - which represents more than 17% of their total lending portfolio.  

A boost to Saudi workforce participation rate is also generally supporting the consumer banking market. There is a renewed push under the reform plans to create jobs for Saudis, and I believe this will also provide business opportunities for the banks as greater employment rates should lead to greater consumer banking opportunities, from salary accounts to payments, credit cards and longer term financing and saving products.

A major theme that is also expected to shape the future of banking globally is the advancements in digital banking and its gradual adoption. A relatively young population, a rising internet penetration and a very high smartphone adoption is driving the shift in Saudi Arabia towards the advancement of digital banking channels and is offering the banks further growth opportunities in retail banking. We think this is an area of great potential for our banking sector in the years to come.

We have also seen growth in bank investment books over the last few years. We see this as another potential growth area that we believe will continue to boost bank Net Interest Margins in the years ahead. The share of investments in the aggregate banking sector claims to public and private sector has gone up from approximately 8% at the start of 2015 to over 20% by Mar 2019. Majority of these investments are made into government and quasi-government bonds. We see these increased sovereign bond issuances as an opportunity growth area that will likely boost the banking sector profits from their investment activities.

Asset Quality – Macro trends

All these good future growth prospects in the banking sector, however, comes with inherent risk of higher bank credit costs. Stress in some of the sectors of the economies of the region combined with the mandatory classification of loan impairments under IFRS 9 reporting standards caused NPL ratios to increase in the last couple of years. In addition to the general economic slowdown witnessed in the recent past, we also saw negative trends in asset quality in the region because of several factors including slowdown in government spending on capital expenditure projects – resulting in several projects being postponed or cancelled, limited credit growth and weak corporate and consumer sentiments. Furthermore, while the asset quality issues initially were a result primarily of the construction sector stress, we have seen the stress also spreading into other sectors as well – including manufacturing and commerce. Asset quality concerns, however, seem to have eased in 2018 and 2019 as provisions in the domestic banking system also remained ample. The Saudi banking NPLs and provision coverage ratios continue to hold steady at 1.8% and 157% respectively at the end of the second quarter of 2019- meaning that the banking sector continues to adequately put funds aside to cover for any future deterioration in asset quality.

Going forward, there are several positive macro indicators that would suggest that the asset quality of the banking sector in Saudi Arabia and generally in the region, would improve;-

First, global oil prices have been at the center of the asset quality related stress witnessed in most parts of our region over the past few years. Higher oil prices positively impact government’s ability to spend, increase in project related activities and improve domestic sentiments. Recent oil price trends have been positive although they have come under pressure in the last few months mainly because of trade related issues between China and the USA. Even if oil prices were to decline from their current levels, they are still likely to be higher than the levels budgeted by the governments in the region and we are optimistic that this will be positive for asset quality trends in the banking sector.

Second, government expenditure pattern has been a major factor determining the direction of banks’ asset quality in the past few years. NPL formation rates generally move up when government expenditure declines. We expect future government payments especially in Saudi Arabia to be driven in part by the direction of the oil price and government capital expenditure plans, i.e. the fiscal budget. The Saudi government announced its plans for expenditure for 2018 until 2023 in Dec 2017. In this plan, the government is prioritizing growth over fiscal consolidation, pushing out plans to balance the budget to 2023. As a result, the higher budgeted spending is expected to be a positive for banks’ asset quality trends.

Finally, the recent and expected future US Fed rate reversal could bode well for lowering the cost of doing business for corporates and aid the eventual impact on corporate loan demand. While we expect some downward pressure on banks Net Interest Margins post the recent Fed interest rate cut during the second half of 2019 and the first half of 2020, we nevertheless expect banks to utilize other strategies to defend any pressure on their NIMs. We, therefore, expect lending growth to pick up and credit costs to gradually decline – partly helped by the expected low interest rate environment.

I am generally optimistic that these positive macro trends would drive better asset quality in the banking sector, in the years ahead.

Ladies and Gentlemen, as regulators, we cannot however, leave the asset quality management of the banks to just the market forces alone. It is not good enough to be optimistic that better economic conditions will eventually ease any pressure on credit quality. Bank asset quality management requires a systematic, proactive and focused approach. Whereas standardized rules for managing non-performing loans are in place in many jurisdictions, the same cannot be said when it comes to rules dealing with debt restructuring. Yes, Bankruptcy Laws are a key step in the right direction, but they mostly would only address court led restructuring yet the vast majority of debt restructuring cases are handled out of the courts.

The banking system can only work effectively if there is an effective means of restructuring corporate debt. As an early preventive action, it is therefore important that regulators help corporates and their banks not only use restructuring workouts to preserve shareholder value but also reduce the required specific provisions for non-performing loans. Such restructuring arrangements between the banks and their customers should be on the idea that cooperation will prevent greater loss, and that banks will work with the distressed customers to resolve financial difficulties that would otherwise likely lead to liquidation. That is why, we at SAMA, found it fit to separately (separate from the dictates of the Bankruptcy Laws) provide guidelines to the banking sector for restructuring schemes for their stressed loans. To support the overall growth of the economy in line with vision 2030, we performed a health check of the current practices in the banking sector with respect to the management of problem debt. The aim was to ensure that appropriate support is provided by the banking sector to Micro, Small and Medium Enterprises and corporate businesses in distress. We further undertook a benchmarking exercise that reviewed the most developed, recognized and recent frameworks on the management of problem debt gathered from across the world. In addition, we considered studies conducted by the International Monetary Fund (IMF), International Finance Cooperation (IFC) and World Bank as well as the Basel Committee guidelines. Following the review and benchmarking exercises and in consultations with the banking sector, MSMEs and the big corporates, we clearly set out our supervisory expectations to the sector on problem loan management through the issuance of guidance on best practices. Whereas SAMA's role in the workout process is consistent with its principal function - which is to promote the general stability and effective working of the banking system - it is not, however, our practice to force banks to take decision on workouts which are against their commercial judgment. Instead, we try to achieve our objectives through the provision of guidance and through moral suasion. We hope the changes we have made will help the banks to combat the challenges of NPLs, asset quality and capital adequacy and will also help reinforce other successful practices adopted by the Kingdom towards establishing a growth-oriented sustainable economy under Vision 2030.


Ladies and Gentlemen, it is important to use robust debt restructuring processes to ensure the survival of businesses. Avoiding bankruptcies of potentially viable businesses will not only help preserve jobs in our region but can also be a driver of economic growth. Corporates and banks need to work together in this process. We as regulators would also need to play a key role in ensuring international best practices in the restructuring of problem debts. I am confident that this summit will go a long way in helping come up with practical solutions to tackle identified problems in this area.

On the very note, I wish you all a very fruitful exchange of experience during the summit.

Thank you.

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