Saudi Arabia Bails Out Banking System After Interbank Rates Hit 2009 Highs

Amid what some might call self-inflicted economic collapse, Saudi Arablia has announced a $5.3 billion bailout of its banking system as interbank borrowing rates near the highest since Lehman. In what the supposedly central bank calls "supportive monetary policy...on behalf of government entities," is easing liquidity constraints with 28-day repo agreements and is the second liquidty injection this year.

While Saudi default risk has fallen - as the entire world has been liquified in recent months - it remains worse than Mexico, Russia, and South Africa.

As Bloomberg reports, The Saudi Arabian Monetary Agency, as the central bank is known, is giving banks about 20 billion riyals ($5.3 billion) of time deposits “on behalf of government entities.” It’s also introducing seven-day and 28-day repurchase agreements, as part of its “supportive monetary policy.” It didn’t provide further details.

The announcement, which comes as the kingdom prepares for its first international bond sale, is the latest step by the central bank to ease a cash crunch in the banking system. The Saudi Interbank Offered Rate, a key benchmark for pricing loans, has surged to the highest in seven years after the plunge in oil prices forced the government to withdraw money from the country’s banking system, squeezing liquidity.

The cash crunch risk undermining bank’s ability to lend to businesses, adding to the strain facing economic growth at a time when the government is cutting spending to shore up its public finances. The economy will likely expand 1.1 percent in 2016, according to a Bloomberg survey, the slowest pace since 2009.

The central bank was said to have offered lenders 15 billion riyals in short-term loans in June to help ease liquidity constraints.

“Sama is being proactive to ensure liquidity meets economic and financial requirements, said Monica Malik, chief economist at Abu Dhabi Commercial Bank, using an acronym for the central bank.


“This will provide a breather to the banks and the planned sovereign bond issue will also help. However the government’s funding requirements are much larger and the issue of tight liquidity is likely to persist.’’

Bankers and analysts alike hope that this action "will show investors that the government is committed to support the banking system," but - as with the US in 2008, and EU in 2012, this is more likely to drive risk aversion as instea do picking winners, traders broadly avoid the sector in an attempt to not get caught holding the sacrificial lamb.

The move is “the next step in the continuing story we’ve been hearing since the start of the year on the tightening of liquidity among Saudi banks and a follow-on to the first injection provided to banks earlier this year,” said Murad Ansari, a Riyadh-based analyst at investment bank EFG-Hermes.


“The liquidity situation remains challenging. However, it shows that the central bank will continue to support Saudi banks.”

Even worse - some might say - A royal decree read on the channel following the broadcast announced a cut to ministers' salaries by 20 percent and to members of the appointed Shoura Council by 15 percent.

"The cabinet has decided to stop and cancel some bonuses and financial benefits," read a line of text on Ekhbariya TV, as a minister read to assembled ministers and royals, including King Salman, a list of cuts to be made in various grades in the civil service.

With all eyes on Algiers this week - and the outcome very unlikely to be a freeze deal - as we detailed previously, Saudi Arabia is becoming increasingly desperate for higher oil prices, and the need to bail out its banking system is a big red warning flag that this is far from over.