Data and projections: January 2023

Chart of the quarter

During 2022, Saudi Arabia experienced periods of unexpectedly tight liquidity in the banking sector, which was visible in spikes in the spread of the local riyal interbank interest rates relative to international rates lending dollars (US LIBOR). These spikes peaked at about 1.5 percentage points in April, June and October but in early 2023 had eased back to 0.6pp, similar to the average during 2020-21, although still higher than in 2019. The spikes were unexpected because high oil prices usually result in strong domestic liquidity, and hence low interbank spreads. However, the government has not been depositing as much of its oil windfall in local banks as in previous cycles. More importantly as the fastest growing G20 economy, Saudi Arabia has been experiencing strong credit growth, linked in part to Vision 2030 investments and the post-pandemic recovery, whilst deposit growth has not kept pace. The tight liquidity led SAMA to intervene on several occasions, most recently in October, to ensure the banking sector can still support the credit expansion. This was all happening in the context of a rapid increase in SAMA’s policy rate, mirroring the US Fed, but other Gulf states implementing hikes did not see a similar volatility in spreads.