According to data provided by the Saudi Arabian Monetary Agency (SAMA), the three-month Interbank Offered Rate, which determines the interest rate on commercial borrowing, rose 0.13% in November to 1.11625%. This significant advance in traditionally stable Saudi interest rates was dictated by the dramatic 10-fold rise of the Saudi budget deficit and a lack of business confidence amid the oil slump.
About 80% of Saudi fiscal revenues come from the oil industry, and crude prices are now some 40% below the level they'd fallen to twelve months ago. Consequently, there is less free money liquidity in the economy.
Demand deposits slumped 4.7% in October, and the liquidity squeeze in the Saudi banking system continued into November as well. The decline in the amount of money kept in Saudi banks has by now dropped to its early-1990s level, according to some estimates. The Saudi government has also recently failed to provide timely financing to certain development projects, which has hit the private sector.
Riyadh could have fixed the situation by introducing monetary easing measures similar to those practiced in many advanced economies, like Japan or the Eurozone countries. However, as the nation's currency, the riyal, is pegged to the US dollar, a one-time depeg would trigger a crash devaluation with serious consequences.
The Saudi government is running a budget deficit as the nation's breakeven price for oil stands at $105/bbl for this year. In order to cover expenses, Riyadh issued at least $14.65 bln worth of debt securities, drawing the money from the Saudi banks. In 2014, the Saudi fiscal deficit stood at 2.3% of GDP, even though oil prices were above $100/bbl for at least half of that year. According to IMF projections, this year the Saudi budget deficit is expected to rise to about 20% the nation's GDP.
Meanwhile, the Saudi banks have been hit by the liquidity squeeze as well. In October, their loans-to-deposits ratio rose to 83.8% from 82.5% twelve months prior.
Although the Saudi economy hasn't been badly shaken yet by the decline in oil prices, it has by now lost its development momentum, meaning the nation's capability to expand oil production is limited. As most Saudi energy projects are bound to falter amid the mounting disinvestment, crude prices will settle at a more stable foundation.