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The author is grateful to Saudi Arabia’s authorities for their thoughtful comments and suggestions. The author would like to thank Tim Callen, Jaime Rafael de Pinies Bianchi, Harun Onder, Mustafa Saiyid, Hui Tong, and the participants in the MCD Discussion Forum for helpful comments and discussion, and Diana Kargbo-Sical and Gilda Radwan for excellent administrative support. Any errors are the author’s responsibility.
The 3-month SIBOR ended 2016 at 2.035 percent, marginally up from its low registered in mid-December.
The authors argue that underdeveloped financial systems in the MENA region hamper economic growth and that more needs to be done to improve the institutional environment and functioning of the banking sector.
Data on the international investment position and the BIS banking statistics suggest that the Saudi banking system’ cross-border exposures are small.
Growth of NPL provisions is a more direct and likely a better measure of banks’ capacity to extend credit than NPLs in Saudi Arabia. This is because in Saudi Arabia, banks have been provisioning for NPLs counter-cyclically, weakening the linkage between NPL ratios and credit growth. Indeed, the author did not find plausible results using NPL ratios instead of growth of NPL provisions.
A panel fixed-effects approach suffers from a downward Nickell bias when a lagged dependent variable is included in the right-hand side of the regression equation. In such circumstances, a system Generalized Method of Moments (GMM) approach proposed by Arellano and Bover (1995) and Blundell and Bond (1998) is used commonly.
Given the Saudi riyal’s peg to the US dollar, we do not include the US Fed funds rate and the 3-month SIBOR together in regression models. Some of the deposit base in Saudi Arabia is interest free.
The 3-month SIBOR spread to US dollar 3-month LIBOR is not significant in bivariate nor multivariate specifications.
The estimated coefficient appears low despite bank credit in Saudi Arabia being primarily funded by deposits. However, the value of the estimated coefficient (i) doubles when real credit growth is regressed on contemporaneous real deposit growth and (ii) increases to around unity when median values of bank-level data (as shown in Figure 3) are used to regress real credit growth on contemporaneous real deposit growth.
Predicted credit growth using regression results without 2008 and 2009 time dummies is not shown.
Information from Bloomberg on the amounts issued is scant. In 2007, the Saudi government issued two 10 year bonds for SAR 200 million each and one 10-year bond for SAR 2 billion.
SCIs are unlevered non-deposit taking entities that rely mainly on budgetary support by the MoF. They target lending to, for instance, housing, critical industrial projects, and SMEs, some of which do not have access to bank lending. The Saudi Industrial Development Fund (SIDF) finances industrial projects, the Public Investment Fund (PIF) large scale government and private industrial projects, the Real Estate Development Fund (REDF) individual/corporate residential and commercial real estate, and the Saudi Agricultural Development Fund (SADF) farmers and agricultural projects. The Saudi Credit and Saving Bank (SCSB) provides interest-free loans to small and emerging businesses and professions. Al-sadig (2013) finds that private domestic investment is positively associated with SCI lending.
Banks offer bridge financing to construction projects financed by SCIs. One SCI provides SME credit guarantees in collaboration with banks (kafala). Another SCI offers top-up financing for mortgage borrowers to meet the recent 70 percent LTV limit.
Bankscope’s classification of state ownership include “General Investment Funds” and “Government of Saudi Arabia via various funds” which are interpreted as the PIF and remaining ownership by the government.
This is consistent with the result from Alhumaidah et al (2016). The chapter uses an asset-liability management framework to discuss the benefits and risks as well as the macroeconomic implications of different financing strategies for the fiscal deficit, and illustrates some of these aspects through a simulation analysis. It also reviews a number of policies that will help expand the investor base and reduce financing costs, while having broader positive implications for the economy.