Saudi short-term money market rates are likely to remain at 20-year lows because banks are awash with liquidity and reluctant to lend after two family conglomerates unveiled huge debt restructurings, said analysts.

Overnight rates have even touched negative territory several times in recent days, reflecting banks' reluctance to receive more deposits after the central bank halved the rate it pays banks for deposits in June.

"Rates for short-term deposits are down as the banking system has ample liquidity," said Monica Malik, regional economist at EFG-Hermes in Dubai.

"Credit growth to the private sector remains weak as banks are reluctant to lend partly due to well-publicised difficulties being faced by family businesses," she said.

Gulf banks have taken provisions after two troubled Saudi firms, Saad and Ahmad Hamad Algosaibi & Brothers (Ahab), said they would restructure debt. The firms and the central bank have declined to specify the scale of the problem.

A number of banks said they face potential write-downs on loans made to the two groups with HSBC estimating the lending exposure of Saudi banks alone at up to $7 billion (Dh25.71bn).

"It is still very much that money is parked on the sidelines, there is no real interest to go anywhere else. The debt restructurings are weighing quite strongly on the market," said Elisabeth Gruie, emerging markets strategist at BNP Paribas in London. Saudi overnight rates were quoted at 1.00/1.50 per cent yesterday, but have traded at as low as -0.30 per cent.

One-week Saudi rates were quoted at as low as 0.25 per cent on Monday and were at 0.05/0.25 per cent by 12pm UAE time. One-month rates were quoted at 0.09/0.29 per cent and three-month at 0.16/0.31 per cent.

There are often no quotations during a day's session on the Reuters composite page for overnight rates, due to wide bid-offer spreads or disparate price quotes among contributors.

Analysts say the lack of price quotations is not a sign of markets freezing up – as they have for Ukraine, Iceland and Latvia over the past year – because Saudi banks remain in good shape and the world's biggest oil exporter enjoyed sound economic data. "There is no systemic banking risk. The overall banking system remains well capitalised and highly resilient," said Riyadh-based economist John Sfakianakis.

Low US rates are dimming the prospects of an imminent recovery in Saudi short-term yields, said BNP Paribas' Gruie.

"Short-term rates are low across the global (markets) and have been low in Saudi Arabia for months," said Simon Williams, regional economist at HSBC in Dubai.

But despite uncertainty over banks' exposure to Saad and Ahab, several big lenders such as Al Rajhi Bank and Samba Financial Group posted profit gains in the second quarter, while deposits rose.

Most banks' loan books fell in the quarter but private lending edged up for the first time this year in June to SR728.7bn (Dh713.67bn) from SR724.9bn in May.

"Money supply growth will decelerate in 2009 as a result of the lackluster credit environment and as the monetary base, especially the net foreign asset position, falls," said Malik.

The world's biggest oil exporter has been drawing on foreign reserves to keep the economy going. The government plans to spend $400bn up to 2013 to diversify its economy.

 

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