Monday, May 30, 2011

(This story was originally published Sunday.)

RIYADH (Zawya Dow Jones)--The Saudi Arabian Monetary Agency, or SAMA, the country's central bank, kept its key interest rates unchanged for June as bank lending to the private sector continued to exhibit modest rates of growth, people familiar with the matter said Sunday. SAMA held its overnight reverse repurchase rate at 0.25% and the benchmark repurchase rate at 2%, the people said.

SAMA last cut its overnight reverse repo rate by 25 basis points to 0.25% in June 2009 in an attempt to spur credit growth in the local economy after the region's top banks were hit badly by lower oil prices, a collapsing real-estate market and deteriorating asset values as the Gulf region suffered its worst economic contraction in almost a decade.

Saudi Arabia has drawn on its reserves, which have grown on the back of surplus income from oil exports over the decade, to fund record budgets and spend as much as $400 billion on its five-year infrastructure development program.

King Abdullah also announced a massive spending program earlier this year in an effort to address housing and unemployment problems, and to boost public sector wages, which will cost the government at least SAR485 billion ($129.28 billion) over several years.

While this spending helped the world's top oil exporter grow in 2010, according to the kingdom's budget released last December, banks have remained hesitant to extend credit.

"The block of state initiatives...underpinned the government's willingness to continue to drive the economy. This enthusiasm has not yet led to an extensive improvement in the private sector's investment appetite," Banque Saudi Fransi said in a research note Sunday.

Private bank credit, excluding investments in securities, expanded 6.4% in April, edging lower from growth of 6.5% a month earlier, and credit to public sector enterprises similarly dropped 5.8% in the month to April 30.

"Private sector businesses meanwhile are not expanding their businesses as much as they had been prior to the financial crisis. These factors have contributed to the temperate pace of improvement in the loan environment," Saudi Fransi added.

Saudi Arabia's annualized rate of inflation rose to 4.8% in April, from 4.7% in March, data from the Central Department of Statistics & Information showed earlier this month.

Muhammad Al Jasser, SAMA's governor, has repeatedly said that inflationary pressures, caused mainly by an increase in global food prices, are worrying, but the central bank sees no need to change its interest rate policy.

The Arab world's largest economy is likely to see only moderate inflationary pressures in the second quarter of this year on the back of lower food prices, SAMA said in its quarterly report released earlier this month.

However, in the medium to long term, the kingdom is likely to see slower inflation rates as King Abdullah's recent decision to build 500,000 homes and increase the ceiling on loans from the Mortgage Development Fund will put less pressure on the rent index, SAMA added.

-By Summer Said, Dow Jones Newswires; +966-546-842373; summer.said@dowjones.com

Copyright (c) 2011 Dow Jones & Co.

(END) Dow Jones Newswires

30-05-11 0349GMT