JEDDAH: The Saudi Arabian Monetary Agency (SAMA), the Kingdom’s central bank, cut its repurchase rate by 50 basis points to 2.5 percent. SAMA also reduced its deposit rate, the reverse repurchase rate, for the first time since April to 1.5 percent from 2 percent. The moves are aimed at ensuring adequate liquidity to meet domestic credit demands.
Howard Handy, chief economist at Samba Financial Group, said, “I think SAMA’s interest rate cuts decision is appropriate and attuned to the circumstances, both domestically and internationally. The cuts mark a further step in the process of monetary easing that is being undertaken by central banks worldwide in order to free up money and capital markets and encourage banks to resume or expand lending.” He added that cyclical conditions in the Kingdom are now more in sync with those in the G-7 and leading emerging markets, and fiscal and monetary authorities around the world are focused on tackling a deepening recession at a time when inflationary pressures have subsided. “The concern of policymakers now is to avert deflation,” Handy said.
He added: “I think the process of monetary easing has quite a bit further to go and we are likely to see leading central banks, especially the US Fed, put increasing emphasis on quantitative easing (direct actions to expand the monetary base).”
Echoing Handy’s comments, Faisal Alsayrafi, managing director and CEO of Financial Transaction House (FTH), said, “It’s a wise and timely decision by SAMA. The rate cuts are according to the world trend to encourage credit flow between the banks and increase in lending.”
With inflationary pressures receding, the emphasis has shifted to alleviating the impact of the global financial crisis by slashing interest rates, guaranteeing bank deposits, supporting stock markets and pouring funds into banking systems.
“SAMA’s rate cuts were aggressive and pre-emptive in order to push down the cost of borrowing. The cost of borrowing rose since the beginning of the past summer and the intent by the central bank is to push SAIBOR (Saudi Interbank Offered Rate) quickly down. Private sector access to credit and cost of borrowing are key factors that would stifle nonoil private sector growth in 2009 and SAMA doesn’t want to see this happening,” John Sfakianakis, chief economist at SABB (Saudi British Bank), said.
The Gulf region has massive infrastructure projects under way designed to diversify its economy away from relying on oil export revenues. Oil prices have tumbled more than $100 a barrel since hitting record levels above $147 a barrel in July.
Much of the $600 billion worth of projects currently under way or planned in the Kingdom are reliant on private sector funding.
However, with the local banks less willing to lend, the cost of borrowing rising, a shortage of dollars and access to external finance greatly reduced, securing this financing was becoming a problem, hampering implementation of the project boom, the Riyadh-based Jadwa Investment said in its monthly bulletin for December.
