Saudi Arabia Seen Stepping Up Fight Against Bank Cash Crunch

Saudi Banks Face Liquidity Crunch
  • Kingdom takes measures to shore up economy amid low oil prices
  • Banks face liquidity squeeze as government pulls deposits

Saudi Arabia may be embarking on a new phase in its efforts to stave off the worst of a cash crunch among its banks.

The kingdom’s central bank, known as SAMA, offered domestic lenders about 15 billion riyals ($4 billion) in short-term loans at a discounted rate at the end of June to help ease liquidity constraints, people familiar with the matter said on Sunday. The step came less than six months after SAMA allowed banks to lend a greater percentage of deposits.

Saudi Arabia is taking unprecedented steps to shore up its finances as the collapse in crude prices hobbles domestic banks, which hold 2.26 trillion riyals in assets, in a country that gets more than 70 percent of its revenue from oil. SAMA is seeking to stimulate borrowing and boost the financial industry. Liquidity has tightened since the government withdrew some of its deposits and sold local-currency debt to banks to fund the budget deficit.

"Saudi banks are likely to continue to face liquidity tightness due to the large funding needs of the government and still solid private sector credit growth," said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC. The cash injection provides "immediate support to banks’ abilities to lend. We expect further steps, such as reducing the reserve requirement ratio and increasing the loan to deposit cap in the coming days."

Most Saudi lenders took advantage of SAMA’s offer, three bankers with knowledge of the matter said.

Alinma Bank’s Chief Executive Officer Abdul Mohsen Al Fares told Al Arabiya TV last month the lender received deposits from SAMA worth more than 1 billion riyals. Bank Albilad’s CEO in a separate interview with the TV channel also confirmed the bank got funds, while Saudi Investment Bank’s CEO said his bank didn’t receive cash in the second quarter.

The intervention is "an extremely important signal to the market that the central bank is prepared to do whatever is needed to improve liquidity," John Sfakianakias, the Riyadh-based director of economic research at the Gulf Research Center, said by phone on Monday. “It’s a signal of pro-activeness that the tools available on the monetary side are going to be deployed and over time could have a pro-growth effect for the overall economy.”

The kingdom previously pumped funds into its banking system as oil prices retreated in the 1990s, he said.

Currency Probe

Saudi banks’ combined loans-to-deposit ratio, a key measure of liquidity, climbed to 90.2 percent in June, the highest level since November 2008, according to central bank data. SAMA in February allowed them to lend the equivalent of 90 percent of their deposits, up from 85 percent.

As well as providing liquidity and easing rules on lending, SAMA is clamping down on banks that are low-balling interest-rate submissions and probing banks’ currency products that allow speculators to bet against the kingdom’s currency peg.

Twelve-month Saudi riyal forwards climbed to the highest level on a closing basis since May 27, reflecting growing speculation that the currency will weaken. The contracts advanced 5.4 percent as of 1:55 p.m. in Riyadh, implying a 1.7 percent drop to 3.8172 per dollar. The three-month Saudi Interbank Offered Rate was unchanged at 2.24 percent on Monday, the highest level since 2009, according to data compiled by Bloomberg. The rate has almost tripled in the past 12 months.

This increase in rates “could cripple gross domestic product growth as borrowing becomes more difficult and expensive for the private sector," said Anita Yadav, the head of fixed-income research at Emirates NBD PJSC, Dubai’s biggest bank. “SAMA’s move to ease the liquidity in the banking sector is very welcome and, in fact, it’s somewhat too little too slow."

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