The increase in two key interest rates by Saudi Arabian Monetary Authority (Sama), the central bank, are credit positive for Saudi banks because they will prevent Saudi investors’ and depositors’ capital

outflows and positively reflect the Saudi banking system’s stable liquidity conditions, said Moody's Investors Service.

 

Last Thursday, the Sama raised its two key interest rates by 25 basis points in response to the decline of Saudi money rates below US rates in recent weeks. 

 

Sama increased its repo rate, the reference for its financing to banks, to 2.25 per cent, the first hike since 2009, and raised its reverse repo rate, the reference for banks’ lending and their deposits placed with central bank, to 1.75 per cent.

 

Saudi Arabia’s improving liquidity and funding conditions since 2017 have driven the Saudi Arabian Interbank Offered Rate’s (SAIBOR) spread against US dollar London Interbank Offered Rate (LIBOR) to its lowest level since 2009, even reaching negative spreads in recent weeks, despite a number of rate hikes by the US Federal Reserve. 

 

Last Thursday, the three-month Saudi rate was 13 basis points below its US dollar equivalent (it was more

than 100 basis points higher than at the end of 2016), a negative spread that, if it persists and widens, risks triggering an increase in capital outflows as Saudi investors and depositors seek higher returns, it said.

 

Sama's decision also reflects a funding situation that has materially improved since 2015 and 2016, when plunging oil prices and large sovereign debt domestic issuances reduced funding available to Saudi banks and negatively affected their funding costs. During those tight liquidity conditions, Sama left its repo rate unchanged despite five US interest rate increases since 2015 that Saudi authorities replicated on their reverse repo rate to maintain the peg between the Saudi currency, the riyal, and US dollar. 

 

Since 2017, however, liquidity conditions improved for Saudi banks, with credit contracting by 1 per cent last year and public-sector deposits increasing 12 per cent, underpinned by improving oil prices and increasing international sovereign bond issuances. As a result, banks’ liquid assets rose 11 per cent in 2017 to a record SR457 billion, while the ratio of reserves (including cash in the vault and balances with Sama) to total deposits climbed to 14.8 per cent at year-end 2017, the highest since year-end 2012. The increases occurred despite a 3 per cent decline in private-sector deposit growth last year after a 4 per cent increase in 2016, Moody's said. - TradeArabia News Service