ETF Trends
ETF Trends
  • Low crude oil environment has dragged on Saudi Arabia’s economy
  • Moody’s said Wednesday it was downgrading Saudi Arabia’s banking system from “stable” to “negative”
  • Moody’s also projected Saudi Arabia’s real gross domestic product to slow to 1.5% for 2016 and 2% in 2017

The ongoing low crude oil environment has dragged on Saudi Arabia’s economy and caused ratings agency Moody’s to warn of risks in the emerging market’s financial system, weighing on the country-specific exchange traded fund.

Despite somewhat bouncing back on higher crude oil prices, the iShares MSCI Saudi Arabia Capped ETF (NYSEArca: KSA) is still down 8.3% year-to-date.

While Brent crude oil has rebounded to around $40 per barrel, the depressed prices continue to weigh on the Middle East oil producer. Consequently, on Wednesday, Moody’s said it was downgrading Saudi Arabia’s banking system from “stable” to “negative,” citing its negatively revised outlook reflected “the rating agency’s expectation that the persistently low oil prices and resultant government spending declines will ultimately weigh on the Saudi banking sector,” reports Holly Ellyatt for CNBC.

Moody’s anticipates loan growth to slow down to between 3% and 5% from 2016, compared to 8% in 2015 and 12% in 2014. Additionally, the ratings agency expects asset risk to rise due to the deteriorating operating environment.

The weakening outlook on the financial industry will weigh on the Saudi Arabia ETF as banks are among the largest positions in the fund’s portfolio. Financials make up 31.7% of KSA’s portfolio, with top holdings including Al Rajhi Bank 6.4% and national Commercial Bank 6.1%.

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