How Saudi Arabia Fixed Its Cash Crunch

In an interview in Davos last month, Saudi Arabia’s central bank governor, Ahmed Alkholifey, announced that the cash crunch that squeezed commercial lenders last year is over.

He’s correct. Total deposits in the banking system showed an improvement from mid-2016, rising to 0.8 percent year-on-year in December compared with a year earlier. The Saudi Arabian Monetary Authority has done its job by intervening twice in 2016. And in February 2016 it increased the loan-to-deposit ratio from 85 percent to 90 percent to increase liquidity. By that time, its three-month interbank rate had reached a seven-year high. Equally critically, bets for a devaluation of the riyal reached their highest in about two decades in January 2016, even after the authorities had pledged to keep its currency peg. Almost every trader outside of Saudi Arabia was convinced that the kingdom was close to devaluing its currency or even depegging.