Saudi Arabia's central bank on Sunday cut its key interest rate by 1 percentage point, and reduced banks' cash reserve requirement by 3 percentage points in steps aimed at boosting liquidity during the global credit crisis. The move by the Saudi Arabian Monetary Agency follows particularly dismal performance on the country's stock exchange, which started the Saudi work week on Saturday with a 9.2 percent drop that dragged its benchmark Tadawul All Shares Index down to a five-year low. The exchange – the Arab world's largest – closed down almost 3.8 percent on Sunday, continuing its fall on the back of slumping crude prices and overall economic gloom around the world. So far this year, the Saudi market is off over 61 percent. SAMA lowered the repo rate, the country's benchmark lending rate, from 4 percent to 3 percent, and cut the cash reserve requirement to 7 percent from 10 percent, the central bank said. The cut was the second time it had lowered the repurchase rate since early October. The case reserve rate is now down from 13 percent. “These measures are taken against the backdrop of receding inflationary pressures and for ensuring that adequate system liquidity is available to meet steady domestic demand,” SAMA said. John Sfakianakis, chief economist at the Saudi British Bank, said the reduction in the cash reserve requirement would free up about $3 billion of additional deposits – a key step as “demand for credit by the private sector is still quite strong.” Such steps are crucial to sustaining investor confidence and continued lending and growth in the country, particularly as overall weakness in global equity markets spills into the Gulf Arab region, where developers have announced real estate projects worth hundreds of billions of dollars. The Gulf governments have taken a number of steps to boost investor confidence and liquidity in the wake of the financial crisis, including cutting lending rates, pumping money into the economy and guaranteeing bank deposits. The Saudi bourse has been among the hardest hit in the Gulf. Only Dubai's Financial Market has fared worse, recording year-to-date losses of about 67 percent. Fueling the recent drop in Saudi's market are falling crude prices, which have tumbled about 66 percent from mid-July highs of $147 per barrel. Sfakianakis said Saudi Arabia is still well positioned to withstand the effects of the global financial crunch, despite oil prices falling below the country's estimated fiscal break-even point of between $50 and $55 a barrel. “Saudi Arabia, today, is much better placed to weather the storm than at any other time in its recent economic history,” said Sfakianakis, citing lower government debt and foreign assets of about $450 billion that can be tapped as a stopgap to counter falling crude oil prices. “I think you will now see more government spending in certain key areas,” Sfakianakis said. “The budget will be more robust than what people expect it to be. “I'm not too worried about 2009.”
