Slower bank deposit growth and heavy loan demand are tightening financial conditions, compounded by regional spillover from tightening liquidity across the United Arab Emirates. Meanwhile, regional central banks cannot freely inject cash into their banking sectors because their currencies remain pegged to the US dollar. Adding to the instability, the collapsed Yemen ceasefire has sparked Houthi strikes on sites like the Aramco Tower, along with militia attacks on the East-West Pipeline.
Key points
Government withdrawals and surging loan demand are driving up domestic borrowing costs de…: Government withdrawals and surging loan demand are driving up domestic borrowing costs despite the recent rebound in crude extraction.
Regional currency pegs to the United States dollar prevent monetary authorities from free…: Regional currency pegs to the United States dollar prevent monetary authorities from freely injecting liquidity into the struggling banking system.
Infrastructure designed to bypass the Strait of Hormuz remains vulnerable to escalating s…: Infrastructure designed to bypass the Strait of Hormuz remains vulnerable to escalating strikes from Yemeni Houthis and Iraqi militias.
Sources checked by our analysis pipeline: 1
Saudi Arabia is feeling the pinch of a liquidity crisis as bank deposits slow and the economy comes under pressure from the US-Israeli war on Iran, a new report from Bank of America says.
In a note to clients, Bank of America said Saudi Arabia is grappling with “contagion” caused by liquidity tightness in the UAE and a rapid slowdown in the kingdom’s own economy, according to an article published on Bloomberg on Tuesday.
The report said Saudi banks are feeling the pain in the UAE, which is also grappling with fallout from the Iran war and tighter liquidity. Saudi banks are closely linked to their Emirati neighbours, with a high number of interbank transactions contributing to deposits at Saudi banks.
At the same time, the Saudi economy is under strain and government entities are making withdrawals from Saudi banks. But loan demand is high, which is effectively raising the cost of Saudi money.
The liquidity strain is notable for Saudi Arabia because its currency is directly pegged to the US dollar, along with Gulf states including the UAE, Qatar,…
Domestic borrowing costs are surging because government entities are pulling deposits out of local banks just as regional lending demands accelerate. Cross-border financial spillovers from the United Arab Emirates and strict central bank dollar pegs are exacerbating the shortage. At the same time, renewed regional warfare and militia attacks on critical infrastructure are adding severe headwinds to the kingdom's broader economy.
Yields in the Treasury space are defying historical patterns by remaining elevated even as crude costs decline. This divergence signals that broader inflationary pressures have broadened significantly beyond initial energy sector shocks, blunting the relief that cheaper fuel normally provides. As a result, upward pressure on borrowing costs persists across the wider economy despite falling commodity prices.
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