JEDDAH: The Saudi Arabian Monetary Agency (SAMA), the Kingdom’s central bank, cut its benchmark repo rate to 3 percent from 4 percent, the second reduction in a month, and the cash reserve requirement local banks have to make on demand deposits to 7 percent from 10 percent in order to boost domestic liquidity after inflation receded.
According to the SAMA statement, “The measures were taken against the backdrop of receding inflationary pressures, ensuring that adequate system liquidity is available to meet steady domestic demand.”
All Gulf Cooperation Council (GCC) states, except Bahrain, have reported inflation above 10 percent this year. Inflation in Saudi Arabia eased to 10.4 percent in September from 10.9 percent the previous month, after hitting a record 11.1 percent in July.
The three-month Saudi Interbank Offered Rate fell to 3.495 percent after the SAMA announcement from 3.511 percent on Saturday.
The moves can also enable banks to lend more money to investors in the ailing stock market. However, the Saudi stock market failed to react positively to SAMA’s announcement. All other regional markets also dropped yesterday. The Tadawul All-Share Index (TASI), which dived 9.2 percent on Saturday, slid another 3.8 percent to 4,264.52 points.
“Neither the drop of repo rate nor decreasing the reserve requirements on deposits has helped the stock market which shows extreme lack of confidence of what may happen next. Such fear is usually common at a time of uncertainty,” said Faisal Alsayrafi, managing director and CEO of Financial Transaction House (FTH).
Prior to yesterday’s cuts, SAMA reduced on Oct. 12 the repo rate to 5 percent from 5.5 percent and the reserve requirement to 10 percent from 13 percent.
About a week later, it directly poured $3 billion in deposits into the banking system to ease liquidity pressures, its first direct injection of US dollars in a decade.
Some 10 days later, it cut the repo rate by 100 basis points to 4 percent.
Commenting on SAMA’s decision, Brad Bourland, chief economist at the Riyadh-based Jadwa Investment, said, “It does two things. It will improve the liquidity of the banks and ability of borrowers to get loans and it should provide some support to the stock market.”
A number of Saudi economists and businessmen have called for government intervention to protect the Kingdom’s private sector from the impact of the global financial crisis.
“Our government officials are still saying that the Kingdom’s economy will not be affected by the crisis but SABIC (Saudi Basic Industries Corp.) stocks have lost 40 percent of market value during the past weeks,” explained Abdullah bin Mahfouz, a member of the Council of Saudi Chambers of Commerce and Industry.
“Reassuring words will not be enough. The private sector must be given proper direction on how to handle the crisis in order to reduce its impact.”
Mahfouz urged Saudi banks not to hesitate in giving loans to private companies.
The fortunes of the private sector in Saudi Arabia depend heavily on government spending, which in turn is subject to the price of crude oil.
A vertical fall in oil prices over the last four months, coupled with production cuts by oil exporters, has raised concern over growth prospects of the Saudi economy.
Despite being flush with oil revenues, economies in the Middle East are starting to feel the impact of the global financial crisis, which is freezing up credit markets, roiling stock markets and undermining economic growth.
In the United Arab Emirates, the Dubai Financial Market dived 4.7 percent to 1,917.15, the lowest level in more than four years, pulled down by the market leader, property developer Emaar, which shed 7.8 percent.
Emaar stock closed at 2.73 dirhams, its lowest in well over four years. The share has shed more that 81 percent this year. The real estate sector lost 7.6 percent.
Dubai’s sister market, the Abu Dhabi Securities Exchange, dropped 1.26 percent to 2,797.76 points as the leading real estate sector shed 2.5 percent and energy sector dropped 6.1 percent.
The two markets were unimpressed by news that Amlak Finance and Tamweel, two Dubai-based property finance firms with assets of around $7 billion, have begun a merger process.
Shares of the two were suspended on the Dubai market.
The merger will establish a real estate finance bank compliant with Shariah rules.
The Kuwait Stock Exchange, the second largest Arab bourse, closed down 0.75 percent at 8,809.30 points despite a 1.1 percent increase by the leading banking sector.
Doha Securities Market ended the day four percent weaker at 5,575.81 points, a two-year low, while Muscat Securities Market dropped 2.6 percent. Bahrain Stock Exchange finished 0.85 percent lower.
The sharp slide in the price of oil, the main source of income for Gulf states, is affecting investor sentiment over fears about its impact on Gulf economies. Benchmark crude oil prices have plunged by two thirds from their record highs above $147 a barrel in July.
— With input from agencies