SAMA struggles to spur credit amid crisis

RATE CUTS: Interest rate cuts made by Saudi central bank unlikely to see off growing crisis in bank lending. (Getty Images)

Further cuts in official Saudi interest rates or reserve requirements for banks are unlikely to prove enough to see off a growing crisis in bank lending that centres around trust in borrowers, analysts said on Wednesday.

The Saudi Arabian Monetary Agency (SAMA), will likely follow Tuesday's surprise move to slash its deposit rate for banks holding cash at the central bank with an aggressive cut in its benchmark repo rate to kickstart lending, economists said.

But signs that the domestic money market is beginning to seize up are at heart about concerns that troubles brewing at two Saudi conglomerates will spread and monetary measures will not provide the necessary boost to banks' confidence.

Problems at Saad Group and Ahmad Hamad Algosaibi & Bros Co (AHAB) have highlighted growing risks for the Gulf region, which has been battered by the financial crisis despite their strength in energy exports and savings stored in sovereign funds.

Bankers have said SAMA has frozen several accounts linked to the owners of the two family-owned groups, but the Saudi central bank has not made any public statement about the issue.

"The real issue here is the lack of transparency when it comes to the scale of the defaults by these two firms and other firms that may be facing problems," said Abdulhamid al-Amri, a member of the Saudi Economic Association think-tank.

Saudi banks have extended no new net credit since September, said Caroline Grady, economist at Deutsche Bank.

"The bottom line is that SAMA has limited tools left to encourage banks to lend. Additional cuts in reserve requirements could well be in the pipeline but this will not guarantee a return to previous levels of lending," she said.

SAMA on Tuesday sought to boost lending by halving the reverse repo rate - the rate it pays to commercial banks for deposits - to 0.25 percent, its lowest in at least 20 years.

It left the key repo rate unchanged at 2 percent but analysts said that would improve credit growth little, if at all.

"Banks are very long (on liquidity). But there is not a happy appetite for loans because of the recession and the quality of credit coming forward is not good. It is a conundrum for SAMA," said the head of treasury at one local bank.

"There are constraints as to what a regulator can do in these conditions. The banks continue to be more risk averse because of the context," said John Sfakianakis, chief economist at HSBC's Saudi affiliate, SABB bank.

Like central banks around the world, SAMA has slashed interest rates since October. It reduced the repo rate from 5.5 percent to 2 percent on Jan. 19.

Still, bank claims on the private sector by the end of April were still below their level in August 2008 while bank deposits with SAMA have more than doubled.

"(SAMA) has further ammunition to reduce the lending rate if credit growth shows signs of weakness and needs support. We believe the lending rate could be cut by 50 basis points in 2009, should the need arise," EFG-Hermes said in a note.

"The key concern remains to be the widespread risk aversion of the banking sector and reluctance to lend, and until this changes we are not likely to see a significant change in credit growth," it added. (Reuters)

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