Latest Middle East News

The rise and fall of the US dollar is not worrisome

It is expected that Saudi Arabia will keep interest rates low throughout the balance of this year and carry on tracking U.S. monetary policy.  This is in a continued effort to motivate banks to resume their normal lending activities, according to a leading Saudi economist.

Even though inflation has risen in the last few months, the rate is not a source of worry like it was during 2007 and 2008, when the nation’s central bank pushed area banks to increase lending.  This is according to chief economist at the Banque Saudi Fransi, John Sfakianakis.

Sfankianakis noted that the Kingdom, an oil powerhouse worldwide, is joining other oil producers in the region by continuing to track the monetary policy of the U.S. Feds, mainly due to the historical relationship between currencies in the Gulf and currencies in the West.

The dollar that experienced a steady climb from December to June also helped to reduce the Kingdom’s imports costs and put more overseas purchasing power in the hands of Saudis, according to Sfakianakis.

If the dollar continues to weaken throughout the last half of the year Saudi import costs could rise to some extent, which may trigger inflation.  However, Sfakianakis noted that there are no substantial consequences anticipated.

Because the majority of import costs in Saudi Arabia are paid out in dollars, inflation over in Saudi Arabia’s major trading partner nations make the most difference.

The inflation rates of 2007 and 2008 were much more of a concern than today’s rates.  Although, because of dampened growth in money supply and an economy that has yet to hit the trends, the situation is sticky and could be more harmful than anticipated, according to Sfakianakis.

Interest rates are expected to remain steady for the balance of 2010.  Because the Saudi Arabian Monetary Agency (Sama) has maintained their repurchase rate set in January 2009 and their reverse repurchase set in June 2009, it is expected they will also remain steady in their policies.  That could change with a major inflation increase.

The rates between banks in the Kingdom and other Gulf nations are mostly steady over the past months with economies in the region still struggling through recovery after the worldwide economic crisis of 2008 and the debt default programs happening locally.

Sfakianakis noted that Sama is holding steady at lower rates while they track Federal Reserve policies.  This is complimentary to the need Sama has of motivating asset-rich banks in the Kingdom to lend surpluses out instead of holding tight as they are currently doing.

The Saudi Arabian banks control the second biggest asset collection in the Arab region and have increased foreign assets by almost 13.2 per cent this year.  That amount has been taken from overnight Sama deposits, an amount that has decreased nearly 25 per cent since January.

Sfakianakis said that banks are beginning to increase lending but are still shy as they continue to handle bad debt difficulties that became apparent in 2009.  The difficulties of Saudi banks are much less that the level experienced by others in the Gulf region and around the globe.

Even so, growth rates for consumer lending rose in the period of April to June, hitting nearly 10 per cent up from 7.2 per cent in the first three months of the year.  Extended credit to the health and utilities sectors from private banks grew 38 per cent in the second quarter at the same time that credit to the communications and transportation sectors rose 9.6 per cent and credit to the oil and gas industry grew by 17.7 per cent.

Sfakiankis noted that even though credit extended to the Kingdom’s private sector has increased, deposits have also risen even faster.  This means that the loan-to-deposit ratio had dropped to 80.5 per cent in June.  This ratio decreased from 87 per cent in the beginning of 2009 and over 90 per cent later in 2008.

Expectations for the performance of Saudi’s economy in the second half of 2010 are still good, given the improved level of banking credit, higher crude oil prices and a modest boost in the participation of the private sector.  Those elements signal better performance as 2010 closes.