Economic experts shrug off lower interest impact on Saudi economy

Saudi Arabia’s economy is unlikely to be impacted by lower interest rates, two economic experts told Argaam on the sidelines of the Euromoney Saudi Arabia Conference 2019 last month.

Talaat Hafez, Secretary General of the Media and Banking Awareness Committee of Saudi Banks, said policy rate cuts will not hurt the Saudi economy, and if any, it will be a “very marginal impact”.

“The rate cuts will help local banks expand their credit activities, as most loans are medium to long-term facilities,” Hafez said.

In addition, the Saudi riyal-dollar peg has largely benefited the Kingdom on the levels of fixing FX rates and insulating the local economy from FX rate volatility, he continued.

Most of the Kingdom’s revenue and payments are dollar-denominated, accordingly a fixed FX rate is essential.

“On the other hand, mergers between banks are healthy when they generate additional value either to clients, or to the market share, regional and overseas expansions, or higher employment rates,” Hafez said, adding the Saudi Arabian Monetary Authority (SAMA) has been always keen to open the door for new banks.

Similarly, Abdullah Baeshen, chairman of TeamOne Consulting, said lower interest rates will promote the local economy, adding that the decision was not optional amid the riyal-dollar peg.

“The great expansion in housing loans was backed by the state as a guarantor, as well as the improved legislative system of the baking sector,” Baeshen said.

“Banks have used to lend major firms and high-net-worth individual (HNWI), but banks and financiers have currently shifted to diversify their credit portfolio due to high risks and potential bankruptcy,” he continued.

The presence of Saudi banks is only limited to the Kingdom – a key risk, Baeshen added, concluding that mergers between local banks will strengthen their position and help them expand regionally and overseas.