Liquidity seen to remain tight in Saudi Arabia

Liquidity conditions in Saudi Arabia will likely remain tight for the time being due the expectation of higher capital outflows, lower deposits and an increase in interbank rates, Bank of America Merrill Lynch (BofAML) said in a report on Wednesday.

On the other hand, stabilizing oil prices, a planned US dollar bond sale in the range of $10 billion to $15 billion, and the possible issuance of “I Owe You” notes (IOUs) to domestic contractors could help ease liquidity conditions, the report suggested.

New data released by the Saudi Arabian Monetary Agency (SAMA), the kingdom’s central bank, showed signs of strained domestic liquidity in April, even as the country continues to tap into its foreign exchange reserves.

BofAML said such signs were “surprising given that the $10 billion international syndicated loan facility was signed in late-April,” and explained that there’s a possibility that loan disbursement did not occur during the month.

Large year-to-date drop in foreign exchange reserves “reflects pressures arising from both the current account (driven by government fiscal policy) and financial account,” the bank said.

Bank deposits dropped 0.7 percent month-on-month (MoM) in April and 1.7 percent year-on-year, led by weakness in the Saudi riyal and foreign exchange deposits.

Building and construction was the leading sector in terms of loan growth, and represented 21.4 percent of outstanding credit. The loan-to-deposit ratio rose to 88.7 percent, from 87.5 percent in March.

 “Still robust credit growth reflects in part loan facilities extended to domestic contractors in lieu of government overdue receivables,” the report added.

In addition, an increase in dollarization within the private sector was highlighted, which rose for a fourth consecutive month to 7.8 percent. The bank, however, added that SAMA had enough foreign assets to meet conversion of all riyal-denominated deposits, if required.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com