SAMA vice-governor continues on path of stability

Q: What role can the Saudi Arabian financial sector play in supporting efforts to diversify economic growth and elevate social development in the country?  

A: The Saudi Arabian Monetary Agency [SAMA], through its two major strategic objectives, aims to discharge its responsibilities for maintaining the stability of the financial sector and supporting sustained economic development. SAMA’s strategy has always been adequately responsive to the changing business and economic environment to ensure that it delivers on its strategic objectives. 

The regulatory regime adopted by SAMA throughout various economic cycles has focused on ensuring the stability of the financial sector and at the same time, through its policies, encouraged the banking sector to support economic growth and prosperity. On its part, SAMA’s forward-looking monetary policy has ensured that inflation remains low and that the value of the currency is steadily maintained against the US dollar. 

A strong, well-capitalised, liquid and well-regulated banking system continues to channel resources into productive sectors, including the private sector, which constituted the major catalyst for bringing further diversification to the economy. It is also contributing to the development of priority sectors such as small and medium-sized enterprises [SMEs] and residential real estate. For SMEs, the banks’ credit lines to this sector have been relatively small; however, SAMA – through its Banking Vision 2020 initiatives – has worked with banks to create a more efficient operating model to support this sector, while maintaining financial stability requirements. 

We have engaged in direct dialogue with other government stakeholders who can support SMEs, and the major challenges and opportunities have been identified. These efforts have culminated in the creation of the SMEs General Commission, which has a mission to support this important sector through the collaboration of all stakeholders, including the banking industry. SAMA also has various initiatives in the banking sector to introduce more technology, support financial education and promote financial inclusion. Also, in recent years SAMA has taken several steps to strengthen consumer protection and transparency.  

Finally, the payment system that is maintained and operated by SAMA has always been a major driver for efficient and effective trade operations and execution of financial transactions. SAMA has continued to invest in the whole eco-system, including technology and supporting elements. The payment system has expanded its services and product offerings and its business strategy for 2016 onwards is to further support financial transactions and inclusion through more efficient, resilient, secured and responsive solutions. 

Q: What are SAMA's expectations for credit growth in the Saudi banking sector over the coming year? What will be the main pressures on asset quality in 2016? 

A: The government, in its ninth five-year plan ending in 2015, invested heavily in major infrastructure projects, as well as the healthcare industry and education facilities. As a result, the country witnessed an expansion phase across all sectors of the economy and the rate of growth in overall credit extended by banks was about 12.1% for the five years ending 2015. Given that major projects by the government were mostly completed by the end of 2015, and as new government initiatives are placing more emphasis on economic diversification, credit growth will certainly take a different shape in 2016 onward. 

Total domestic credit in 2015 grew by 9.3%, while credit to the private sector grew by 9.8%. This was slightly below the trend of the past five years where there has been double-digit credit growth. In 2015, 21% of total bank credit was granted to the commerce sector, while a further 12.7% was provided to the manufacturing and processing sector. Credit extended for personal loans was 24.8%, and for the corporate and residential real estate sector the figure was 13.7%. 

We expect that in 2016 credit will continue to grow, albeit at a slower pace, but in the high single digits. Growth will feature across most sectors, with some slowdown in the building and construction sector. 

As far as asset quality is concerned, we do not expect any major changes in the current situation where the non-performing loans [NPL] to total assets ratio is at a historical low of 1.13% and the NPL coverage ratio is at 172%. Given the countercyclical provisioning policies, any minor fluctuation in asset quality can be easily accommodated.

Q: In what ways will the temporary relaxation of the loan-to-deposit ratio benefit the Saudi banking sector?  

A: The major issue faced by the banking sector in the last quarter of 2015 was the rising cost of funding due to the impact of rising interest rates, year-end competition for bigger shares of deposits by banks and the revival of the government debt programme. The situation was also affected by the large withdrawal of funds by some public sector entities that wished to invest in government bonds. These factors combined to make it costly for banks to raise deposits to meet continued loan growth. 

SAMA has temporarily relaxed the loan-to-deposit ratio rules, from 85% to 90% for 2016. This will enable Saudi banks to meet the continuing growing credit demands, without having to resort to expensive borrowings. The loan-to-deposit ratio will be closely monitored by SAMA throughout 2016 in light of economic conditions and can be retained or adjusted back to lower levels if the funding situation improves. However, SAMA does not expect that such relaxation in the loan-to-deposit ratio would lead to undue growth of lending practices beyond the reasonable level expected for the year.

Q: To what extent has speculation driven volatility in the forward markets for the Saudi riyal in recent months? What steps is SAMA taking to defend the currency?  

A: The volatility in the forward market against the Saudi riyal was prompted by the significant drop in oil prices over a short period. Consequently, the Saudi riyal, like the currencies of many other oil-producing countries, came under pressure. This also reflects the current global markets, where many hedge funds and investment funds are prepared to take a position without understanding the history or fundamentals of an economy. However, SAMA’s policy on the currency peg has been constant and consistent over the past 30 years [the last minor adjustment was made in 1986]. We believe that the advantages of SAMA’s policy far outweighs any disadvantages. In recent months, SAMA has asked Saudi banks to take certain steps to counter speculation. These initiatives have been successful.

Q: To what extent is the Saudi banking sector able to accommodate future sovereign debt issuance?  

A: Saudi government debt had declined to 1.6% of GDP by end of 2014, from a high of 115% of gross domestic product [GDP] in 2001. Over the past decade, the banking sector has been concerned that such a massive reduction in government debt had withdrawn some of the key instruments of the banking industry for managing their investment, trading and repo activities.

At various points in this period, banks had requested that the government bond programme should be revived. We believe that Saudi banks have good capacity to invest in Saudi government bonds, which are considered high-quality liquid assets. Banks can finance these from their cash reserves, treasury bills and from replenishment of their overseas investments. They will help the banks to maintain and even improve their liquidity ratios. 

Q: What is SAMA's outlook for the Saudi economy in 2016 and beyond?  

A: SAMA’s views on the Saudi economy in 2016 and beyond remain optimistic, despite the twin deficits – fiscal and external – we had last year. While there is likely to be an economic slowdown this year, we continue to see GDP growth of about 1.8%, which is higher than the International Monetary Fund's forecast of 1.2%. We also see continued growth in the non-oil private sector, whose share of GDP reached 49% by end of 2015, and the public and private sector non-oil economy of 70% of GDP.

Private consumption, which constitutes about 40% of GDP, has grown by more than 30% on average in the past five years, and is another strong impetus for private sector growth besides government spending.

With oil prices at their current level, we continue to project a current account deficit, mainly as a result of reduced oil receipts. We expect inflation to inch up to about 4% this year mainly due to the partial removal of subsidies and credit growth in the high single digits. This growth will be in all sectors, but particularly in residential real estate. We expect the financial sector will continue to grow steadily and the banking sector in particular will remain strong and healthy.

Abdulaziz Saleh Al-Furaih is the vice-governor of the Saudi Arabian Monetary Agency, the country's central bank.