SAMA introduces 7-day and 28-day repurchase agreements, two new money market instruments
The Saudi Arabian Monetary Agency (SAMA), the Kingdom of Saudi Arabia’s central bank, has infused about 20 billion riyals ($5.3 billion) into the banking system in the form of time deposits on behalf of government entities, at a time when the country’s banks are grappling with the effects of low oil prices, as reported by Bloomberg on September 25th, 2016. SAMA is also introducing 7-day and 28-day repurchase agreements, two new money market instruments, as part of its monetary policy to help banks fight the surge in market interest rates caused by low oil prices and to overcome liquidity constraints.
Over the past two years, the plunge in oil prices and a lingering war in neighboring Yemen has forced the government to draw down on its deposits in the banking system, which has dried up domestic liquidity to the extent that the three-month Saudi Interbank Offered Rate, a key benchmark used for pricing loans, has jumped to the highest level since 2009. Of the total fund infusion by SAMA, 15 billion riyals was offered to lenders in short-term loans in June 2016 to help ease the liquidity crisis. The move by SAMA comes after the first injection provided to banks earlier in 2016. The Saudi index for banking shares has declined 17.6% in 2016 compared to a 14.4% drop for the benchmark Tadawul All Share Index.
Saudi Arabia, which is faced with an economic crisis, is predicted to likely grow by just 1.1% in 2016, the slowest pace since 2009. The kingdom’s economy, which is predominantly fueled by oil revenue, is faced with a crisis owing to stunted public sector growth, leading economists to predict a whopping $87-billion deficit in 2016. In 2015, Saudi Arabia saw its budget deficit widen to nearly $100 billion, or 15% of its GDP. In 2016, the International Monetary Fund expects the budget deficit to narrow to about 13% of the country’s GDP and below 10% in 2017. To narrow its ballooning budget deficit, Saudi Arabia is planning to sell its first international bonds.
Saudi introduces several austerity measures
Saudi Arabia’s government has introduces a series of austerity measures to save funds and stem its widening budget deficit, including slashing of ministers’ salaries by 20% and of Shoura Council members by 15% in a series of Royal Decrees. The government has also scaled back financial perks for public-sector workers, as reported by Reuters on September 27th, 2016. Government employees make up about two-thirds of the working population in Saudi Arabia.
The decree also includes a 15% reduction in benefits toward cars and housing for Shoura members. There will be a 15% cut in the lump sum amount spent on Shoura members, including the price of vehicles, expenses for drivers, maintenance and fuel during their four-year term. However, troops involved in combat operations along the southern border and those involved in security, military and intelligence operations outside the Kingdom from a moratorium have been allowed an annual increment for the Hijri year 1438.
Curtailing of overtime bonuses, annual leave, transportation allowances for employees during vacations, are the other austerity measures included in the decree. Appointments and hiring in all vacant posts and programs in all government posts will be also halted until the end of the current fiscal year. The government has also decided not to hire any non-Saudis or renew or extend their contract in non-essential sectors until the end of the current fiscal year.
Saudi offers to cut crude output
Saudi Arabia, the world’s biggest oil exporter, has offered to cut its output to January 2016 levels at an informal meeting of the Organization of the Petroleum Exporting Countries (OPEC) member nations at the sidelines of the International Energy Forum in Algeria from September 26-28th, 2016. Economists believe that the Algiers meeting will be only consultative and that the OPEC will unlikely reach a firm decision on freezing output by all member nations. However, it appears that Saudi Arabia may still be willing to work toward the group’s first production curbs ever since the OPEC allowed member nations to produce at will in late 2014, causing prices to plunge. Saudi Arabia pumped a record 10.69 million barrels a day in August 2016, compared to 10.2 million in January 2016.
New economic strategy – Vision 2030 plan
Saudi Arabia is going through an economic resurrection to reduce dependence on oil production and achieve diversification as part of its long-term growth strategy, named the Vision 2030 plan. The brainchild of Deputy Crown Prince Mohammed bin Salman, the son of King Salman, the plan aims to reduce fuel and utility subsidies as well as cut billions of dollars in spending. The Kingdom is also looking to cancel more than $20 billion of projects and slash ministry budgets by 25%, aimed at shrinking the highest budget deficit among the world’s 20 biggest economies.
Saudi Arabia is not counting on a major recovery of oil prices any time soon, but is instead preparing for a multi-year period of a slump in oil prices. As part of its austerity measures, Saudi Arabia is also looking to merge some government ministries and eliminating others, which would impact the budget for several years. It remains to be seen whether the Kingdom will be able to stem its budget deficit and kickstart its growth engines.