The Saudi economy has gained an impetus to boost growth after the financial sector got its second cut in interest rates for the second time in 50 days.
All the maturities on Saudi Arabian Interbank Offered Rate (SAIBOR) in Saudi Riyals on Thursday closed sharply lower as a natural reaction after the Saudi Arabian Monetary Agency (SAMA) decided on Wednesday to cut basic interest rates after the US Federal Reserve System cut interest rates for the second time this year.
Rising government spending, along with expected credit growth, are two important factors to stimulate macroeconomic growth in the coming period.
The “four” short-term lending rates in Saudi Arabia have fallen between 19.15% and 29.34% since the beginning of the year until Thursday’s closures, according to Al-Eqtisadiah newspaper.
This means that the financial market will receive the beginning of this week, registering the decline of SAIBOR maturities between 54 basis points and 98 basis points for the same period.
Rapid Stock Decline
SAIBOR’s three-month decline has outpaced initial expectations of a break of 2.50% by the end of the third quarter, but SAIBOR is now trading at 2.36%, less than 10 days before the end of the third quarter.
In a research note, JP Morgan economists had predicted, in the first quarter of this year, that SAIBOR would break 2.50% by the end of the third quarter of this year.
But it is clear that the rapid-breaking pace of SAIBOR, which began from last June so far, has surprised many observers.
The currency markets in Saudi Arabia have recorded during the last period rare credit phenomena when twelve-month SAIBOR, in August, was below its three-month counterpart for the first time in 11 years and for the seventh time in 17 years.
These developments came after the phenomenon appeared for the first time in the markets interested in short-term benefits in the month of July, but with the six-month SAIBOR for the first time in seven years and for the ninth time in 17 years.
A one-month SAIBOR showed declines of 19.15%, or 54 basis points, from the beginning of the year to Thursday’s close, where the one-month SAIBOR, the least affected among the four SAIBOR maturities, at 2.26%.
The three-month interest rate, widely used with loans, broke 2.40% to close with last Thursday’s trading at 2.361%.
The three-month interest rate so far has so far fallen 61 basis points (20.62%).
In last week’s trading day, the six-month interest rates drop to 2.365%, so the six-month interest rate has fallen 75 basis points so far (24.12%).
The one-year SAIBOR is the most affected by the four-day SAIBOR declines, with Thursday’s closing at 2.365%, down 29.34%, or 98 basis points, from the first of the year to Thursday’s close.
Reduce Repo and Reverse Repo Rates
SAMA has cut the repo rate, which is used to lend money to banks, to 250 basis points from 275 basis points.
SAMA has also cut the rate of reverse repo agreements, in which commercial banks deposit funds in the central bank, by as much as 200 basis points.
Since the Saudi Central Bank began cutting interest rates on July 31, the Saudi economy has been getting a strong impetus at the credit growth level, after officially and gradually directing towards low interest rates, which coincide with government efforts to stimulate economic growth by increasing capital spending, which rose by 22% in the first half of the year, in light of government spending on housing and other development projects.
Low-cost financing has become a candidate for driving the growth of companies in all their diversified economic activities, after Saudi Arabia cut interest rates in July and September this year as companies are expected to increase their demand for financing to boost their “working capital”.