A surge in demand for Saudi riyal credits has sharply boosted inter-bank interest rates in Saudi Arabia, indicating a continued economic and construction boom in the world's oil superpower, a leading Saudi bank said yesterday.

The surge widened the gap between inter-bank rates and the reverse repo rates to its highest level in nearly six years and it was reflected in a sharp rise in riyal-denominated credits to the private sector, the National Commercial Bank (NCB) said in its weekly bulletin, sent to Emirates Business.

The report showed that on August 9, the 3M Sibor (Saudi Inter-bank Official Rate), stood at 3.92 per cent, bringing the spread over Repo to a staggering 192 basic points, its highest level since October 2002 when it reached 159bps.

"The continued widening of the spread is testimony to the strong demand for SAR funding ... massive infrastructure, energy and industrial projects currently valued at SAR1.9 trillion have been announced. With 26 per cent of these projects marked for completion by 2013, significant financial resources are needed today to facilitate their execution," NCB said.

"To-date, bank credits grew by 18 per cent to SAR704 billion. Growth was driven by private sector lending, which has expanded 20 per cent so far this year mainly in corporate loans. Public credit, on the other hand, contracted by five per cent over the same period," the report added.

NCB said that in an effort to attract more funds to meet soaring lending requirements, Saudi banks raised the SAR3m deposit by 76.8bps last month to 2.59 per cent, the highest double digit increase in 17 months.

The study noted that inter-bank rates are normally taken as liquidity and risk indicators for any economy, adding these rates are often cited as an indication of the credit crunch in the United States, Britain and other European countries, with rates excessively higher than the corresponding benchmarks in each region.

"However, in the Saudi economy, which is constantly tagged as 'awash with liquidity' and with monetary aggregates increasing in the double digit range, such a large spread from the benchmark reverse repo rate merits an explanation.

"The escalation in 3M Saibor reflects a surge in the demand for SAR denominated funds among banks."

According to the bulletin, two indicators reflect the growing demand on SAR funding, mainly an increase in interbank liabilities by SAR16bn from December to May, representing an 80 per cent increase in 2008.

Another factor is the increase in repos with private parties by SAR4.9bn from December to May, which is a 92.5 per cent increase in 2008 to-date.

"In contrast to the credit crunch, Saibor reflects an overheating economy with surging investment," said NCB, Saudi Arabia's largest commercial bank.

Figures by the Saudi Arabian Monetary Agency (Sama), the kingdom's Central Bank, showed inter-bank liabilities jumped from SAR13.9bn in May 2007 to SAR20.8bn in December and a record SAR36.6bn in May 2008.

Repos, better known as repurchase agreements, a sale and repurchase deal between borrowers and lenders, soared from SAR2.9bn to SAR5.2bn and a record SAR10.2bn in the same period, according to Sama.

Its figures showed bank credits to the private sector jumped to nearly SAR673.5bn at the end of May from SAR594.2bn at the end of 2007 and around SAR476bn at the end of 2006.