The Saudi Arabian Monetary Agency (SAMA) – the Kingdom's central bank – Tuesday cut its reverse repurchase rate by half. SAMA said it cut the reverse repo rate by 25 basis points to 0.25 percent, the second such reduction in a year in an effort to “normalize money market conditions against the backdrop of stable macroeconomic activity.” The step, which takes effect immediately, is the latest by the Saudi government to stimulate bank lending that has so far come slowly despite earlier economic stimulus efforts. The cut is the second this year by SAMA. In April, it lowered the rate to 50 basis points from 75 basis points. “The banks are in a risk averse environment. They continue to lend less to the private sector, and they continue to place more with the central bank,” said a chief economist with SABB, the HSBC Holdings PLC affiliate formerly known as Saudi British Bank. “At least from a monetary perspective, they're doing what needs to be done to keep the money away from the central bank,” he said. Although money supply growth has continued at over 3 percent over the past two quarters, total bank credit growth has fallen off sharply since the third quarter of 2008 and has moved into negative territory in the first quarter of this year. Some of the earlier decline in credit growth came as foreign capital was withdrawn later last year because of broader global credit concerns. But analysts note that the continued slide indicates that banks are essentially holding onto the cash and depositing it with the central bank. Saudi banks have placed about SR88 billion ($23.5 billion) with SAMA, according to the latest figures released in April. The hope is the rate cut will make that option less attractive. “Given that the business cycle has turned and that the economy is in a downturn, the economy would benefit from higher credit growth,” analysts at Standard Chartered Bank wrote in a research report released Tuesday. “Reducing the reverse repo rate will reduce the returns commercial banks make by keeping funds with the central bank, thereby encouraging them to resume lending. This will be positive for the economy.” Saudi has weathered the global recession better than most nations, with the government repeatedly showing willingness to tap vast cash surpluses accrued from crude oil's earlier record rally to sustain spending. The country also last week launched a new Islamic and conventional bond market to further develop new debt markets and allow companies in the kingdom to tap financing sources other than banks for their multibillion dollar megaprojects.
