Sheikh Hamad Al-Sayari, governor of the Saudi Arabia Monetary Agency, talks to Stephen Timewell about banking challenges, rising inflation, and planned currency union with the GCC states.
Q How do you see the performance and the results of the banking sector and what are the key challenges facing the banks?
A The banks are doing well, benefiting from the boom in the economy; the results for 2007 are good but we expect the results for 2008 to be even better. It is a solid story, geared for strong growth with a strong competitive environment.
But there are challenges. The major challenge is the scarcity of skilled staff. There is strong demand due to the expansion of the banks, the entrance of new banks and investment banks, the expansion of insurance and expansion of the economy – all of which create strong demand for financial skills. This causes higher staff turnover than would otherwise be the case, leading to strenuous efforts to maintain staff and to more training and development.
While overall bank profits dropped 14% in 2007 compared with those of 2006, this was due to special factors that occurred in 2006 relating to fees from trading. In 2007, the core banking business grew by more than 15% and we expect this to do even better in 2008. The new mortgage law will also create additional opportunities for banks, as will the growing business of project finance, which is driven mostly by investment spending.
Q Inflation is now viewed as a key concern in the region, how do you view it in Saudi Arabia and what is your strategy towards it?
A Inflation is a challenge. When growth started picking up a few years ago, inflation was low as there was some slack in the economy. However, when that excess capacity was exhausted, we noticed inflation picked up in 2006 from less than 1% to 2.2%; it picked up even further to reach 4.1% in 2007, accelerating to 6.5% in December 2007 and then to 7.0% in January 2008.
The driver is strong demand, both from government and private-sector spending, creating pressure on resources, in addition to global inflation (higher commodity prices, higher costs of machinery and equipment), which is putting the costs of projects up significantly. On the domestic front, housing prices have increased significantly and this is a major source of inflation. Most of the inflation is domestically generated – it can be seen in housing and food, where prices rose 16% in 2007.
In terms of strategy, it is a concern when these levels are reached, and we try to programme government spending and restrain growth in money supply. Unfortunately, inflation creates social problems, which leads the government to allocate more spending on safety nets.
The government, however, has adopted a balanced package of inflation measures that not only deals with low-income earners, but also gives allowances of 5% for government employees and takes serious measures on efficiency, competition and on the supervision of these moves.
Q The planned currency union by 2010 of the six Gulf Co-operation Council (GCC) states has come in for a lot of discussion recently. What is the Saudi position relating to currency union and the fixed exchange rate peg to the US dollar?
A We had an agreement with the GCC countries for currency union by 2010, and various committees had agreed on criteria and requirements with some help from the European Central Bank. However, unfortunately, the sudden boom in the economies of the GCC has made it difficult to meet the criteria alongside the other states within the time period.
Without a permanent level of economic activity, it is an unusual time and we have decided to wait until we return to a more sustainable level, rather than set a new schedule. We want to be steady and not commit until we have completed a review.
Any schedule in the future would need to be achievable – so if there are any changes, they will need to be carefully considered. As has often been stated, there is no change in Saudi Arabia’s exchange rate policies, especially with regard to the peg to the dollar.
Q Sovereign wealth funds (SWFs) are attracting a lot of interest in financial circles around the world. Does Saudi Arabia have one?
A Saudi Arabia does not have a SWF in the same form as other countries. However, we have a public investment fund, which invests on a purely domestic basis and may invest abroad in future.
