In Summary
  • Commercial banks now prefer to lend to the government to minimise risks.

The outlook for the private sector credit remains downcast this year due to rising non-performing loans and banks’ preference for government debt to minimise risk.

Kingdom Securities’ analysts say in a 2018 strategy note that the lenders are likely to vote for the safety of government lending as the rate cap on customer loans remains in place.

By the end of October last year, growth in lending to the government averaged 16.9 per cent, double the 8.1 per cent recorded in 2016. At the same time, credit to the private sector grew at just 2.4 per cent in the year to December 2017, against an average growth of 9.4 per cent in 2016.

“We are of the view that the outlook for a strong credit growth remains relatively gloomy, given the rise in non-performing loans and the crowding-out effect supported by the credit to government growth numbers for 2017,” says Kingdom.

“Our projection is for the credit to the private sector growth to remain within the current low levels (two to four per cent), whilst for credit to the government growth will fall within (10 to 17 per cent) for the year, all factors held constant.”

The view mirrors that of Genghis Capital, who also project in their 2018 macroeconomic outlook that the growth is likely to remain stuck in the two to four per cent range.

The two investment banks say although a review of the rate cap law could kick-start lending to private sector, banks will also have to contend with new accounting rules (IFRS 9) which make it costly to lend to riskier customers.

“We hold the view that barring a repeal or review of the current interest rate controls, growth in private sector credit will remain sticky,” said Genghis in its 2018 macroeconomic outlook.

It would also help, Kingdom says, if the government reduces its appetite for domestic debt, most likely through the long overdue fiscal consolidation.