RIYADH, (Reuters) – Saudi Arabia’s central bank sought to boost lending on Tuesday by halving the rate it pays to commercial banks for deposits, after concerns mounted about their exposure to two troubled Saudi conglomerates.
The problems at Saad Group and Ahmad Hamad al-Gosaibi & Bros Co (AHAB) highlight growing risks for the Gulf region, which has been battered by the financial crisis despite its energy exports and its savings stored in sovereign funds.
Saudi-owned Al-Hayat newspaper said Saad and AHAB aimed to restructure $10 billion worth of debt, putting a figure for the first time on the size of the problem facing the financial system.
The Oman and UAE central bank chiefs both expressed concerns on Monday about exposure to the groups, stirring worries that regional banks may have more exposure than previously thought.
Saudi, which pegs its currency to the U.S. dollar, kept its benchmark repurchase rate unchanged on Tuesday but made it less attractive for banks to park money at the central bank in a move analysts say may help thaw lending.
“There has been no new net credit extended in Saudi since September. Corporate and household deposits have been rising but instead of lending out this increased liquidity, banks are parking these additional deposits at SAMA,” said economist Caroline Grady at Deutsche Bank.
The Saudi Arabian Monetary Authority (SAMA) lowered its reverse repo rate from 50 basis points to 25 basis points and left its benchmark repurchase rate unchanged at 2 percent.
“This measure has been taken to normalise domestic money market conditions against the backdrop of stable macroeconomic activity,” SAMA said in a statement.
Credit ratings agency Moody’s told Reuters last week the problems at Saad Group will affect the way it assesses privately held firms across the region.
Analysts expect Gulf Arab banks to eventually reveal exposure to the family conglomerates; some banks in Bahrain have significant links to them.
Both Saad and AHAB have said they are restructuring their debt, without giving the size of their obligations or the companies affected.
“We have to be ready to expect more, not only in Bahrain but also in the region,” said Saleh Hussain, senior consultant at Gulf Banking Consultants.
Bahrain’s Awal Bank is the “in-house” bank of the family Saad, a $30 billion empire run by its chairman Manea al-Sana. Its competitor The International Banking Corporation (TIBC) is owned by AHAB.
Both suffer under deteriorating credit conditions, with TIBC having defaulted on at least some of its obligations, according to Standard & Poor’s.
Banks have said little about their exposures. Oman’s Bank Muscat said its exposures to both Saudi groups total $171.4 million through its Riyadh branch, while its Bahraini unit BMI Bank has exposures of about $44 million.
RATE CUT LIMITATIONS
Cutting the Saudi reverse repo rate usually encourages banks to reduce deposits with the central bank and so increases the incentive for commercial lending.
SAMA is unable to further cut its benchmark rate, currently 2 percent, because the riyal is pegged to the U.S. dollar, restricting its monetary toolkit to the reverse repo rate, said one treasury official at a major Saudi bank who declined to be named because he is not authorised to speak to the media.
“With what’s going with Saad and al Gosaibi, the credit situation will remain tight until we get an idea about the amount of provisions banks are making. This important data will be disclosed when banks announce their second quarter earnings,” he said.
Chief economist John Sfakianakis at Saudi-based SABB bank said: “It remains to be seen if the reverse repo cut will help lenders grant more loans to the private sector. Given the background we have, they will continue to be cautious.”
With oil receipts plummeting, Saudi Arabia has sought to ease liquidity in its financial markets and prop up sagging investor confidence. It has cut the repo rate from 5.5 percent last October and the reverse repo rate from 2.5 percent.
Despite these cuts, bank deposits with SAMA have more than doubled to some 138 billion riyals ($36.7 billion) by end-April from 55.4 billion riyals by end-October.
Bank claims on the private sector at the end of April fell to their lowest level since August 2008.