Gulf central banks ready to tackle liquidity squeeze

Riyadh/Muscat: Gulf Arab central banks said on Wednesday that they would be ready to provide liquidity to help local lenders resist a global financial crisis if necessary but saw no need to step in yet.

Inter-bank lending rates have risen across the world's biggest oil-exporting region as a global liquidity crunch has left banks struggling to finance major infrastructure, real estate and industrial projects during an economic boom.

Two days after the UAE set up a Dh50 billion emergency lending facility, central banks in Saudi Arabia and Oman said they too were prepared to help lenders cope with funding shortfalls.

"SAMA [Saudi Arabian Monetary Agency] has liquidity if needs from banks arise," Hamad Saud Al Sayyari, governor of SAMA, told reporters in Riyadh.

There was no immediate need to intervene as no banks had yet made a request for funding, Al Sayyari added, echoing comments made by the central bank in neighbouring Oman.

"Local banks do not have that liquidity problem to seek extra funds," said Oman Central Bank executive vice-president Mohammad Al Jahdhamy. "If that scenario comes, then the central bank will make the funds available according to the existing instruments."

Market rates have more than doubled in Saudi Arabia since May, while Oman raised its benchmark repurchase rate by 79 basis points yesterday due to tighter credit conditions.

UAE interbank rates, which have almost doubled in less than four months, rose yesterday because of uncertainty about the structure of emergency facility launched on Monday.

No direct link

Al Sayyari said banks in Saudi Arabia had "no direct link" with the worst US financial crisis since the Great Depression.

Still, reverberations from the crisis are being felt in the region, where credit growth has been soaring as banks finance multi-billion-dollar projects.

Other than Kuwait, Gulf central banks peg their currencies to the dollar, forcing them to keep interest rates low and hindering their efforts to bring down inflation rates which are at record or near-record peaks.