Monetary and Macroprudential Policies in Saudi Arabia Ahmed Al-Darwish, Naif Alghaith, Pragyan Deb, Padamja Khandelwal Saudi Arabian Monetary Agency & International Monetary Fund May 2014 SAMA Quarterly Workshop, Riyadh 1
Monetary and Macroprudential
Policies in Saudi Arabia
Ahmed Al-Darwish, Naif Alghaith, Pragyan Deb, Padamja Khandelwal
Saudi Arabian Monetary Agency & International Monetary Fund
May 2014
SAMA Quarterly Workshop, Riyadh
1
Outline
The macroeconomic framework and monetary policy toolkit in Saudi Arabia
International comparison of monetary policy frameworks
Empirical analysis of the monetary policy transmission
Macroprudential policy in Saudi Arabia
International comparison of macroprudential policy frameworks
Conclusion
2
Macroframework and monetary
policy toolkit in Saudi Arabia
3
Macroeconomic policy framework in
Saudi Arabia
Monetary policy anchored by the Saudi
riyal’s peg to the U.S. dollar.
A mix of policies used to influence
economic activity and financial sector
risks
Fiscal policy
Monetary policy toolkit
Macroprudential regulations
4
SAMA’s monetary policy toolkit
Instruments
Statutory Reserve Requirements
Repo and reverse repo operations for short-term
liquidity management
Sale of SAMA paper (SAMA-bills) – increasing over time
as stock of government bonds has decreased
FX Swaps – used infrequently (e.g. during crises)
Deposits Placement – used infrequently, deposits of
government agencies placed strategically with banks
over longer horizons than regular repo transactions
SAMA – Deputy for Research and International Affairs
Rates and paper used
Policy Rate: Repo rate 2% Reverse repo rate 0.25%
Maturity: Overnight, reverse repos a passive liquidity absorption facility
SAMA-Bills: papers issued by SAMA with 80% return of SIBID
Maturity: 1, 4,13 ,26, 52 weeks
Passive amount issued
Government Development Bonds (GDB) with return from 2% to 8.5%
Maturity: 2,3,5,7, 10 years, stopped issuance in 2007
Used as collateral for repo operations
SIBOR/SIBID: the Saudi Interbank Offer and Bid rates
US Fed Funds rate
6
Peg limits SAMA’S ability to set interest
rates independently
0
2
4
6
8
3 Month SIBOR Repo Rate
Reverse Repo Rate U.S. Fed Funds Rate
3-Month Deposit Rate 13 Week Treasury Bill rate
Interest rates track U.S. rates
7
Reserve requirements
Statutory Cash Reserve Ratio (CRR)
◦ 7% of demand deposits
◦ 4 % of the time and savings deposits.
Statutory Liquidity Ratio (SLR)
◦ 20 % of the total commitments of bank
deposits to be held in the form of short-term
assets convertible to cash within a month
8
SAMA has stepped up liquidity
management operations
(100)
(50)
-
50
100
150
200
250
300Excess deposits of banks
Treasury bills held by commercial
banks
Liquidity Management by SAMA(Billions SAR)
9
However, the monetary base is volatile
-20
-10
0
10
20
30
40
-100
-50
0
50
100
150
200
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13
T-bills and repurchase agreements
Other
NIR less Govt Deposits
Monetary Base (RHS)
Contributions to Monetary Base Growth (in percent)
10
International comparison of
monetary policy frameworks
11
Heterogeneity in monetary policy
frameworks across oil exportersCountry Monetary
policy
framework
Saudi Arabia Exchange rate
anchor
Other GCC Exchange rate
anchor
Algeria Exchange rate
anchor
Azerbaijan Other*
Brunei Exchange rate
anchor
Canada Inflation target
Chile Inflation target
Country Monetary
policy
framework
Indonesia Inflation target*
Kazakhstan Exchange rate
anchor
Malaysia Other
Mexico Inflation target
Norway Inflation target
Russia Other
South Africa Inflation target
Trinidad and
Tobago
Exchange rate
anchor
Source: IMF, Annual Report of Exchange Arrangements and Exchange Restrictions, end-April 2013.
* These countries maintain a de facto exchange rate anchor. 12
Saudi Arabia’s macroeconomic
outcomes compare well
Saudi
Arabia
GCC AvgNon-GCC
Avg
0
2
4
6
8
10
12
0.0 5.0 10.0 15.0
Average growth, 2000-13
Vo
latilit
y of gr
ow
th, 2000-1
3
Saudi
Arabia
GCC Avg
Non-GCC
Avg
0
5
10
15
20
25
0.0 5.0 10.0 15.0
Ave
rage
real
expendit
ure
gro
wth
, 2000-1
3
Average inflation, 2000-13
13
Empirical analysis of monetary
policy in Saudi Arabia
14
Monetary transmission channels
Interest rate channel policy rates impact economic activity through cost
of borrowing
Credit channel availability of bank reserves impacts supply of credit
Exchange rate channel exchange rate movements impact net external
demand
Asset price channel monetary policy impacts asset prices which
generates wealth effects
15
Overview of empirical model
Purpose—examine the interest rate and credit channels of
monetary policy transmission
Vector Error Correction Model
Model the impact of movements in interest rates and reserve
money on macroeconomic outcomes
Endogenous variables include government expenditure (G), real
non-oil GDP (Y), private sector credit (Credit), prices (cpi), and
reserve money (RM).
Exogenous variables—oil prices, U.S. GDP, U.S. CPI, and U.S. fed
funds rate.
Saudi interest rate proxied by fed funds rate
16
Results – Long run relationship (1/3)
Long run relationship between endogenous variables is estimated as:G + 8.42*Y - 3.24*Credit + 10.36*CPI - 6.54*RM - 82.49 =et
(3.0) (-3.2) (4.1) (-4.6)
Interpretation: An increase in G or Y is associated with an increase in Credit and RM. Similarly, an increase in Credit or RM may be associated with an increase in G, Y, and the CPI.
Deviations from long-run equilibrium are corrected primarily through adjustments in Y and CPI.
17
Results – Impulse responses (2/3)
Figure . Saudi Arabia: Impulse Responses from a Cholesky 1 s.d. shock
-0.04
-0.03
-0.02
-0.01
0.00
0.01
0.02
0.03
0.04
0.05
1 2 3 4 5 6 7 8 9 10
Response of Credit fromshock to Monetary base
-0.01
0.01
0.02
0.03
1 2 3 4 5 6 7 8 9 10
Response of Non-oil Output from shock to Credit
18
Results – Summary (3/3)
An increase in the U.S. fed funds rate has a significant negative impact on prices but not output – suggesting that normalization of US monetary policy will have limited impact in SA
Credit has a positive and statistically significant impact on non-oil output after 7 quarters – suggesting that credit channel is working
Weak evidence of economic impact from shocks to RM – suggesting scope to develop this further
Increase in oil price increases G with a six month lag
Inflation in partner countries increases Saudi Inflation
US GDP increases Y with a 3 month lag
19
Comparisons and caveats
Results are qualitatively similar to Espinosa and
Prasad (2012) and Cevik and Teksoz (2012)
Caveat:
◦ Useful to check results using a model of
monetary transmission through bank lending
(using lending and deposit rates data)
20
Macroprudential policy toolkit in
Saudi Arabia
21
Macroprudential policy can be used
countercyclically
Fiscal policy main countercyclical tool
But not always flexible enough to prevent credit booms
Expenditure rigidities
Lags in implementation
Volatilities in oil revenues
Countercyclical macroprudential policy can be used to influence economic activity and financial sector risk
22
Saudi macroprudential toolkit
Capital Tools Leverage Ratio
Provisions
Liquidity Tools Loan to Deposit Ratio
Liquidity Requirements
Sectoral Tools Concentration Limit
Loan to Value Ratio
Debt to Income Ratio
Exposure Tools
SAMA has used several macroprudential
instruments (MPI) in the past…
23
Countercyclical MPIs in Saudi Arabia
MPIs have generally not been used in a countercyclical way in Saudi Arabia
SAMA encourages banks to provision in a countercyclical way, but
SAMAs countercyclical provisions are part of the supervisory process and done on a bilateral basis with individual banks
Based on microprudential concerns such as operating performance, composition of assets and riskiness of loan portfolio.
The changes in provisions are not based on macroeconomic developments
24
Despite countercyclical provisioning, credit
has been volatile
Sources: Country authorities; and IMF staff calculations.
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014
Credit Growth Oil Price Growth (RHS)
25
International comparison of
macroprudential policy
frameworks
26
Comparison of toolkit
Capital Tools Leverage Ratio
Provisions
Liquidity Tools Loan to Deposit Ratio
Liquidity Requirements
Asset Maintenance Ratio
Sectoral Tools Concentration Limit
Loan to Value Ratio
Debt to Income Ratio
Sectoral Capital Buffers
Limits on Domestic Currency Loans
Exposure Tools Real Estate
Interbank
FX and Currency Limits
SAMA toolkit is comparable to other
commodity exporters.
27
Countercyclical macroprudential policy is
increasingly the norm
Country Capital Liquidity Sectoral Exposure
Saudi Arabia
Kuwait
Algeria
Azerbaijan
Brunei
Canada
Chile
Indonesia
Kazakhstan
Malaysia
Mexico
Norway
28
EffectivenessCross-country evidence
Sources: Lim et al (2011), International Financial Statistics.29
EffectivenessCanadian Experience
Sources: Krznar and Morsink (2014), Bank of Canada.
0%
2%
4%
6%
8%
10%
12%
14%2006 -
Jan
2006 -
Ap
r
2006 -
Ju
l
2006 -
Oct
2007 -
Jan
2007 -
Ap
r
2007 -
Ju
l
2007 -
Oct
2008 -
Jan
2008 -
Ap
r
2008 -
Ju
l
2008 -
Oct
2009 -
Jan
2009 -
Ap
r
2009 -
Ju
l
2009 -
Oct
2010 -
Jan
2010 -
Ap
r
2010 -
Ju
l
2010 -
Oct
2011 -
Jan
2011 -
Ap
r
2011 -
Ju
l
2011 -
Oct
2012 -
Jan
2012 -
Ap
r
2012 -
Ju
l
2012 -
Oct
2013 -
Jan
2013 -
Ap
r
2013 -
Ju
l
2013 -
Oct
Residential mortgage (average at month end)
Indicates mortgage rule tightening
(y/y growth)
30
Early Warning System (EWS)
EWS prerequisite for using MPIs countercyclically.
Indicators to identify systemic risks such as macroeconomic imbalances and exuberant credit growth
inter-linkages between financial and real sectors
fragility in the structure of the financial system
can be used to determine timing for activation or
deactivation of MPIs (CGFS, 2012) and bring clarity
and credibility to macroprudential policy
Indicators can be used in a ‘Rule Based’ fashion to time use of MPIs
(e.g. Swiss guided discretion approach for CCB)
‘Discretionary’ fashion to guide macroprudential policy
(e.g. UK core indicators monitored by the FPC)
31
FSR and Dashboard
Country First FSR
Bahrain 2007
Kuwait 2013
Oman 2013
Qatar 2010
United Arab
Emirates2013
Country First FSR
Azerbaijan 2010
Canada 2002
Chile 2004
Indonesia 2003
Kazakhstan 2006
Malaysia 2006
Mexico 2006
Norway 1997
Russia 2012
South Africa 2004
SAMA lags GCC & commodity exporters in terms of
FSR, but is planning to publish one soon.
SAMA has developed “internal” macroprudential
dashboard.
32
Formal framework essential to ensure
effectiveness
Strong accountability with clear objectives - Establish responsibility for macroprudential policy
-Coordination and willingness to act
Access to information for effective EWS- Indicators (possibly with thresholds) can counter
biases for inaction
Powers to act in the face of evolving risk-Can be ‘hard’ (direct), ‘semi-hard’ (comply or
explain) or ‘soft’ (recommendation) depending on tools and country specific factors
Communication to create public awareness of risk- Signaling channel of the transmission mechanism
33
International experience with
macroprudential frameworks
Several countries moving towards formal framework
Three models have emerged Central Bank with explicit mandate and powers
(Czech Republic)
Committee within central bank (UK Financial Policy Committee)
Committee outside central bank (Australia, France, USA)
Saudi Arabia considering formal framework – this should be in SAMA
34
Conclusion
35
Key takeawaysShort run issues
There is limited evidence of an adverse impact on GDP from
normalization of US monetary policy
Monetary policy framework
Saudi Arabia’s exchange rate peg has served it well
Although liquidity management toolkit is being developed,
monetary base is volatile
There is scope to strengthen liquidity management
operations as a channel for monetary policy transmission
A liquidity forecasting framework and review of the
instruments to improve effectiveness may help
36
Key takeaways
Macroprudential policies
Countercyclical macroprudential policy can help curtail
credit booms and financial sector risk
SAMA has an adequate toolkit, but tools have not been
used countercyclically
Macroprudential framework needs strengthening to
ensure effectiveness in countercyclical role
37
Questions?
38