Foreign, Local Pressures Boost Saudi Rates

Foreign, Local Pressures Boost Saudi Rates

Short-term interbank rates up nearly 30 bps in 6 months; Rise in USD Libor, geopolitics appear to be factor Bank liquidity still high, loan/deposit ratio moderate; But bank lending jump could pressure rates late this year; Official rate hike probably still distant

April 4, 2012 4:17 by kippreport

Saudi Arabia’s market interest rates are climbing as the economy booms, but the rise is as much due to international pressures as strain on banks’ lending resources, and any hike of official rates probably remains distant.
The increase in interbank lending costs underlines how Saudi money markets are returning to normal since a sudden increase in government spending last year, announced in response to the Arab Spring uprisings in the region, flooded the banking system with money and pushed rates down to record lows.
The three-month Saudi Arabian Interbank Offered Rate has risen to 0.88 percent, its highest level since May 2009, from last September’s low of 0.60 percent. Longer-term interbank rates up to one year have increased by slightly smaller margins, while Treasury bill yields are up in sympathy.
The trend coincides with the country’s fastest economic growth in a decade, thanks to high oil prices and heavy government spending on infrastructure and social programmes. Economy and Planning MinisterMohammed al-Jasser said this week that gross domestic product was heading for 6 percent growth this year after 6.8 percent in 2011.
But other data suggests the economy is still far from the late stage of an economic cycle in which higher demand for funds puts heavy pressure on supply, pushing up market rates.
Commercial banks’ excess deposits at the Saudi Arabian Monetary Agency (SAMA) stayed high at 88.5 billion riyals ($23.6 billion) in February, data released by SAMA at the weekend showed. That was down from 95.4 billion riyals in January but well above levels of around 50-60 billion that prevailed in most of the second half of 2011.
Meanwhile, the ratio of banks’ private sector loans to their deposits was 78.5 percent in February, barely changed from January and below levels around 80 percent seen in the second half of last year. That leaves plenty of room for banks to expand lending further if needed.
Excess funds in the banking system are still high and haven’t decreased to the point where their level would boost domestic market rates, said Paul Gamble, head of research at Jadwa Investment in Riyadh. “The pressures for higher rates are external.”