Interview: Abdulaziz A Al Helaissi
Given the drawdown in government deposits and continued sale of government bonds, are you concerned about liquidity constraints in the sector?
ABDULAZIZ A AL HELAISSI: The Saudi banking system is facing low oil prices from a position of strength. However, the recent drawdowns of government-related deposits placed within the Kingdom’s banks have caused some concern, given the tightening liquidity conditions and the moderation in asset and profit growth. The challenge is due to the fact that deposits are the primary source of funding for Saudi banks, while funding via long-term borrowing has historically been very limited. The subsequent contraction in liquidity has put pressure on the banks’ loan-to-deposit ratios and has elevated funding costs. However, this is offset by still ample foreign exchange reserves, as well as the proactive policies of the Saudi government in response to low oil prices, aimed at both enhancing short-term resilience – e.g., by reducing spending, increasing selected public fees and tariffs, and rationalisation efforts – as well as implementing long-delayed reforms to gradually diversify away from the structural reliance on the oil sector.
These efforts should have a positive impact, as the fiscal break-even oil price is likely to be lowered given the reduction in spending, and increased efforts to rationalise and enhance efficiency. This, coupled with the recent recovery in oil prices, should contribute towards alleviating the financial and liquidity conditions in Saudi Arabia’s banking system.
How strong is the argument that the sector is too rigidly regulated, and how can rules be eased to support greater growth without risking stability?
AL HELAISSI: The Saudi banking sector is well regulated rather than rigidly regulated. The regulation and supervision of the domestic banking system by the Saudi Arabian Monetary Authority (SAMA) has contributed to its strengthening in recent years, including through the early adoption of Basel III capital and liquidity standards. SAMA is also highly regarded in its capacity to protect domestic banks from the problems experienced by other banks across the globe.
Overall, the banking system is strong and resilient to shocks, with profitable, liquid and well-capitalised domestic banks. Non-performing loans are low as a percentage of gross loans and are provisioned comfortably, while its capital adequacy and liquidity ratios are among the highest globally.
As the regulator, SAMA nevertheless applies a pragmatic approach and proactively consults with domestic banks on new regulations. It recently demonstrated this by temporarily raising the loan-to-deposit ratio from 85% to 90% to alleviate pressure on domestic banks, as well as instituting a deposit insurance scheme to formalise a previously implicit guarantee of bank deposits.
Furthermore, its segregation of investment banking activities from banks is something that is now being actively considered and planned in other international jurisdictions, and was well ahead of its time.
How is rising inflation, together with the US Federal Reserve’s decision to raise interest rates in late 2015, affecting lending rates in the Kingdom?
AL HELAISSI: Inflation is expected to rise in line with the recent increase in domestic petrol prices, alongside higher electricity and water tariffs. However, price pressures will remain contained, and this is attributed to the fact that slower economic growth is likely to discourage companies from passing on higher costs. Higher US interest rates have important implications, as the currency peg ensures that US monetary policy continues to influence the trajectory of Saudi interest rates. Sometimes this poses a challenge if the economic cycles between both countries are out of sync, but Saudi Arabia has endured this in past decades from a far weaker financial position.
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