Saudi bank lending slows to lowest level in 7 years

Official data shows bank loans to the private sector rose just 1.8% from a year earlier

Annual growth in Saudi Arabian bank lending slowed in January to its lowest level in nearly seven years, official data has showed, a sign of weak corporate demand but also improving liquidity in the economy.

Bank loans to the private sector rose just 1.8 percent from a year earlier, compared to 2.4 percent in December, the central bank said. It was the slowest growth since February 2010, when the Saudi economy was still recovering from the global financial crisis.

The sluggish growth shows private companies have little desire to make fresh investments, because of an economic slump caused by low oil prices and government austerity measures.

But it is also a sign that money is flowing more freely through the economy. For much of 2016 the government, its finances strained by lower oil export earnings, delayed paying its debts to private firms. This forced them to draw down credit facilities with banks just to obtain operating funds, inflating loan growth figures.

In the last few months the government's coffers have been partly replenished by higher oil prices and a jumbo $17.5 billion debut international bond issue. This has encouraged it to resume paying its debts, and with state money flowing again, firms feel less pressure to use bank loans.

The combination of renewed flows of government money and low demand for new loans is causing Saudi money rates to plunge. The three-month interbank offered rate, which soared to an eight-year high of 2.386 percent in late October, fell to 1.7875 percent on Tuesday, its lowest level since last March.

The government is continuing to draw down assets abroad to help cover a budget deficit caused by low oil prices. Net foreign assets at the central bank fell by $12.0 billion from the previous month to $516.7 billion in January, their lowest level since August 2011.

Among those assets, the central bank's holdings of foreign securities dropped by $4.5 billion to $359.5 billion, while deposits with banks abroad decreased by $6.7 billion to $100.3 billion.

October's debut international bond issue opened up a new channel for the government to raise funds, reducing pressure on its foreign reserves, and at least one more foreign bond sale is expected in coming months.

Last week, sources familiar with the matter told Reuters that Riyadh had sent a request for proposals to banks for a planned US dollar Islamic bond issue. Saudi Arabia is also expected to issue a conventional bond in the international market later this year, another source said.

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