Saudi Arabia cuts banks' support after liquidity rise

Saudi Arabian monetary authorities have eased their support for local banks following an improvement in the liquidity situation and are expected to stick to that policy in the near future, the Gulf country's largest bank said yesterday.

However, despite that improvement, the kingdom's 12 commercial banks are still sticking to a tight lending policy they adopted after the eruption of the 2008 global financial crisis and default problems by two major Saudi family business firms, National Commercial Bank (NCB) said in a study sent to Emirates Business. NCB said it saw a considerable change in the policy of the Saudi Arabian Monetary Agency (Sama), the Saudi central bank, which had deployed its coffers to support liquidity-strapped banks after the crisis.

"Indeed, at this juncture, monetary policy in the kingdom has become more manageable than in the heydays of the financial crisis at the end of 2008 in more than one dimension," the study said.

"In our opinion, the medium-term outlook for the kingdom's monetary policy would resemble the current dynamics especially that the ball is in the territory of local banks, many of whom had decided to remain conservative."

In terms of hard-currency funding, NCB noted Sama had ceased its foreign currency swaps that were used to inject liquidity into local banks.

"Interestingly, by the end of 2009 and the first quarter of 2010, no foreign exchange (FX) swaps were conducted compared to the significant $13.6 billion (Dh49.91bn) undertaken for the whole of 2008," it said.

Sama had also withdrawn almost all of its emergency deposits with the local banking system as well as those that were injected by independent organisations, notably the General Organisation for Social Insurance (GOSI) and the Public Pensions Agency (PPA) by the end of 2009.

"In addition, open market operations had relatively eased compared to 2008, falling by around SR16.4 billion (Dh16bn), almost driven lower by the reduced volume of government bonds. Obviously, the inflation and interbank specters had weighed on Sama's decisions, given the reduced inflationary and liquidity pressures, with inflation range-bound and interbank market back to normalcy," NCB said.

Like in neighbouring Gulf oil producers, banks in Saudi Arabia were jolted by a severe liquidity shortage in the aftermath of the 2008 crisis and the ensuing global credit tightness. The crisis prompted the central bank and other monetary authorities in the region to inject cash into the banking system and cut the ratio of compulsory reserves placed by the banks with central banks.

Although banks in the six-nation Gulf Co-operation Council have largely recovered since the eruption of the crisis, they have remained reluctant to resume normal lending activity because of default problems. Sama's figures showed deposits with Saudi banks largely increased through 2009, reaching around SR940bn at the end of the year compared with nearly SR846bn at the end of 2008. They slipped back to SR921bn in February.

The slowdown in credit, also because of slackening domestic demand, pushed Saudi banks to turn abroad for investment. Figures showed their foreign assets leaped by nearly 75 per cent at the end of last year. From around SR64.8bn (Dh64.1bn) at the end of 2008, the banks' combined investments abroad shot up to SR112.3bn (Dh121.7bn) at the end of 2009, according to Sama.

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