Saudi Arabia Said to Ease Lending Rules to Boost Liquidity

  • Central bank said to have informed banks of decision on Sunday
  • Move said to have followed request by committee of treasurers

Saudi Arabia is easing rules on bank lending to stimulate growth in the largest Arab economy, two people with knowledge of the matter said.

Banks were told they can lend the equivalent of 90 percent of their deposits, up from an earlier limit of 85 percent, by the Saudi Arabian Monetary Agency on Sunday, the people said, asking not to be identified as the information is private. The move followed a request from the country’s committee of treasurers to ease liquidity constraints, one of the people said.

Saudi Arabia is seeking to revive its economy and stimulate credit as the slump in oil and government spending strain the banking system. The three-month Saudi Arabia Interbank rate rose to 1.73 percent on Feb. 3, its highest in about seven years, according to data compiled by Bloomberg. Bets for a devaluation of the riyal reached their highest in about two decades in January, even after the country pledged to keep its currency peg.

Interbank rates in Saudi Arabia have spiked amid a slow down in deposit growth and higher government borrowing
Interbank rates in Saudi Arabia have spiked amid a slow down in deposit growth and higher government borrowing

Calls and e-mails sent to SAMA, as the central bank is known, after office hours in Riyadh weren’t immediately returned.

“This is a confidence boosting measure by SAMA to increase liquidity in the system,” John Sfakianakis, a Riyadh-based economist, said late Sunday by phone. “SAMA is telling banks that in a low money supply environment it will take steps to ensure that credit is available for the private sector.”

Bank Claims

The ratio of bank claims on the private sector to total deposits rose to 85 percent at the end of December, up from 80 percent at the end of 2014, according to data on the central bank’s website. Five of the 11 commercial banks in Saudi Arabia exceeded the 85 percent cap at the end of 2015 based on preliminary financial reports, Aqib Mehboob, senior analyst at Saudi Fransi Capital, said by e-mail on Sunday.

“This reported SAMA directive appears to be aimed at easing liquidity in this weak deposit environment and bringing down the interbank rates,” Mehboob said. “The expansion in the limit should be supportive of credit growth in the first half of 2016, thus positively impacting banking sector profitability, which will also be supported by higher base interest rates.”

The Tadawul All Share Banking Index rose 1.8 percent to 13,451 points at 11.40 a.m. in Riyadh today, while the benchmark Tadawul All Share Index rose about 1.1 percent.

The kingdom is taking unprecedented measures to shore up its public finances and reduce the economy’s reliance on oil. The government has raised fuel prices and trimmed spending in this year’s budget to narrow a deficit that may have been the widest since 1991 last year. The Washington-based International Monetary Fund expects economic growth in Saudi Arabia of 1.2 percent this year, its slowest pace since 2002.

The central bank’s net foreign assets tumbled more than $19 billion in December as the kingdom withdrew reserves amid oil’s plunge. Reserves declined about 3 percent to more than $608 billion, bringing the drop in 2015 to $115 billion, according to central bank data. While Saudi Arabia’s reserves remain among the highest in the world, the drop underscores the kingdom’s struggle to cope with falling oil prices.

The country is also tapping the local debt market to fund a budget gap forecast by the IMF to be 14 percent of gross domestic product this year. It will probably sell about 120 billion riyals of debt in 2016 to support its finances, Saudi Fransi Capital said in October. Last year, the government raised 98 billion riyals through the sale of bonds to local institutions.

Saudi Arabia’s market regulator has also increased the amount that investment funds can allocate to government debt to 35 percent of net assets, up from 10 percent, Maaal news website reported Monday, citing people it didn’t identify.

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