23 August 2016
JEDDAH -- The interest rate environment in Saudi Arabia remains pressured by the tighter liquidity which resulted from the sale of large development bonds to local banks, standing at SR156.6 billion by the end of June, the National Commercial Bank said in its "Saudi Economic Review" report for the month of August 2016.

The 3-month average Saudi Interbank Offered Rate stood at 2.26 by mid-August, exceeding SAMA's 2% Repo rate. SAMA's efforts to curb the surge in the interbank market are not without caveats.

Given the fixed exchange rate regime, SAMA is unable to use the benchmark interest rate to control money markets, however, tools such as scaling back T-bills and loosening macro prudential policies can ease the pressures of the market. In addition, SAMA offered some banks short-term loans of around SR15 billion late June, in order to aid with short-term liquidity constrains.

Such resolution, however, does not correspond to the nature of the liquidity crisis likely to become prolonged. We expect to see further measures such as reducing the reserve requirement ratio and/or increasing the L/D ratio in the near future, especially with SAMA remaining adamant on maintaining the USD/SR peg.

In the month of June, growth in private sector credit rose 8.6% Y/Y, contrasting with deposits falling by 3.3% on an annual basis. Although credit performance is still positive, it is showing signs of moderation. As a result of SAMA's decision to hike the loans-to-deposits ratio (L/D) from 85% to 90%, private sector credit received a brief boost, averaging 10.5% Y/Y for the three months following January. However, May and June's figures show a deceleration in the performance of private sector credit as the L/D ratio stood at 90.2% by the end of June.

Given the liquidity strains in the market, SAMA has additional room to maneuver and further ease the L/D higher on par with other Gulf states in order to accommodate funding needs of the market under tighter liquidity. The liquidity buffers and funding stability which SAMA had built in recent years will allow it to have some space for monetary easing, including the reduction of reserve requirements.

Statutory deposits by the end of June stood at SR94.8 billion which is down by 5.1% Y/Y while excess reserves are at SR24.5 billion, surging by 23.1% Y/Y.

Claims on the public sector tumbled 20.3% Y/Y on the back of a significant drop in T-bill levels, recording the fifteenth consecutive month of decline. Credit extended to public sector enterprises rose 18.5% Y/Y to SR47.8 billion while bank holdings of government securities dwindled by 25.8% Y/Y to 209.4 billion.

Annual growth in government bonds surged by 191.6% to SR156.6 billion, whereas bank holdings of T-bills nose-dove by 76.9% to SR52.8 billion in order to free-up some liquidity for the longer maturity issuances.
Looking at bank credit we note that, on maturity basis, short term credit accounts for 51.7% of total bank credit while medium and long-term credit account for 19.5% and 28.8%, respectively.

The rising risk specter in the domestic economy derailed long-term credit expansion as local business activity significantly moderated on the back of prolonged low oil prices, leaving long-term investment prospects marred by uncertainty.

© The Saudi Gazette 2016