Saudi central bank halves reverse repo rate

Saudi Arabia's central bank sought to boost lending on Tuesday by halving the rate it pays to commercial banks for deposits but kept its benchmark repurchase rate unchanged.

"Sama has decided to lower its reverse repo rate from 50 basis points to 25 basis points effective immediately," the Saudi Arabian Monetary Agency (Sama) said on its website.

"This measure has been taken to normalise domestic money market conditions against the backdrop of stable macroeconomic activity," Sama said.

Banks in the Gulf face exposures to two struggling Saudi family groups. Central bank governors from the UAE and Oman said on Monday the problems at Saudi's Saad Group and Ahmad Hamad al-Gosaibi & Brothers Co (Ahab) were a cause for concern.

Analysts expect Gulf Arab banks to eventually reveal exposure to the family conglomerates. Both Saad and Aahab have said they are restructuring their debt, without giving the size of their obligations or the companies affected.

"It remains to be seen if the reverse repo cut will help lenders grant more loans to the private sector. Given the background we have, they will continue to be cautious," said chief economist John Sfakianakis at Saudi-based SABB bank.

Sama is unable to cut its benchmark rate, currently 2 per cent, any further because the riyal is pegged to the US dollar, restricting its monetary toolkit to the reverse repo rate, said one treasury official at a major Saudi bank who declined to be named because he is not authorised to speak to the media.

"With what's going with Saad and al Gosaibi, the credit situation will remain tight until we get an idea about the amount of provisions banks are making. This important data will be disclosed when banks announce their second quarter earnings," he said.

CUTS

On April 14, Sama cut the reverse repurchase rate by 25 basis points to 0.50 per cent saying then that the move was taken in view of the easing of inflationary pressures in the domestic economy and ample system liquidity.

Cutting the reverse repo rate usually encourages banks to reduce deposits with Sama and so increases the incentive for commercial lending.

With oil receipts plummeting, Saudi Arabia has sought to ease liquidity in its financial markets and prop up sagging investor confidence. It has cut the repo rate from 5.5 per cent last October and the reverse repo rate from 2.5 per cent.

Despite these cuts, bank deposits with Sama have more than doubled to some SR138 billion ($36.7 billion; Dh135 billion) by end-April from SR55.4 billion by end-October.

Bank claims on the private sector at the end of April fell to their lowest level since August 2008. 

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