Saudi Central Banker Says Crunch That Squeezed Banks Is Over

  • Central bank is comfortable with lender liquidity: governor
  • Saudi central bank chief spoke in an interview in Davos

Alkholifey on Opening Up Saudi Markets, Economy

Saudi Arabia central bank Governor Ahmed Alkholifey said a cash crunch that squeezed commercial lenders last year is over and that he’s open to more foreign financial institutions operating in the biggest Arab economy.

The Saudi Arabian Monetary Authority sees no need for further steps to boost banking liquidity, Alkholifey said in an interview with Bloomberg Television in Davos on Thursday, his first with an international news organization since taking office last year.

Alkholifey, a former deputy governor, was appointed in May as the world’s biggest oil exporter grappled with the impact of low crude prices on the economy. With falling revenue, the government drew down on its deposits in the banking system, causing a cash squeeze that sent a key measure used to price loans to the highest level since 2008.

Policy makers responded by injecting billions of riyals into the banking system and deploying other monetary policy tools to ease the strain. Authorities also sold the biggest ever bond from an emerging market in October and cut weekly domestic debt issuance. Interbank rates have fallen 15 percent since peaking at 2.386 in October.

Ahmed Alkholifey

Photographer: Fayez Nureldine/AFP via Getty Images

“We had to intervene,” Alkholifey said. The central bank is now comfortable with current liquidity levels “and I don’t think we need to intervene anymore,” he said. 

The Tadawul Bank Index extended its gains after the governor’s remarks, rising 1.4 percent at the close in Riyadh.

“Further foreign borrowing by the government in the first quarter of 2017 will be important for domestic liquidity, reducing the need for the government to borrow internally,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

Contractor Payments

The government has also repaid more than 270 billion riyals owed to contractors after halting payments because of the slump in crude, Finance Minister Mohammed Al-Jadaan said in December.

The payments have helped ease cash constraints at Saudi banks, Aqib Mehboob, a senior analyst at Saudi Fransi Capital, said. Central bank data suggests that more than 55 billion riyals ($14.7 billion) were to contractors in November, he said. “This has resulted in a significant fall” in the ratio of loans to deposits.

Thousands of low-paid foreign laborers -- employed by construction companies such as Saudi Oger and the Saudi BinLadin Group -- were left stranded in labor camps after the government delayed project payments. Saudi Oger is in talks with banks to restructure about $3.5 billion of debt it has been unable to repay, people with knowledge of the matter said last month.

Alkholifey, without naming any company, said any defaults in the construction industry won’t be “systematic.”

“The exposure of the whole banking sector to the construction sector is less than 8 percent of total loans,” he said.

The governor is part of a senior Saudi delegation attending the World Economic Forum, touting an unprecedented plan to overhaul the economy and reduce its reliance on oil. The kingdom is also courting overseas investments, opening its stock market last year to direct foreign investments and allowing full non-Saudi ownership in several industries.

Foreign Banks

The central bank is reviewing one licensing application from a regional lender and is open to requests from other foreign banks. “We have an open policy,” the governor said. “We accept applications for sure. As we speak we have one application in the pipeline.”

The central bank recently approved a request by Bank of Tokyo-Mitsubishi to operate in the kingdom. “Usually we look at the financial position of that bank” and “the value added to the sector and the economy,” Alkholifey said.

Foreign reserves held by SAMA have dropped more than $200 billion since August 2014, to $538 billion at the end of November, as the kingdom used savings to shore up public finances.

Asked if capital outflows were another reason for the drop in reserves, the governor said: “Capital outflow is a reality. We are operating in a free economy. We never put restrictions on capital outflow. They go and come. It’s not unusual,” he said.

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