Download Monetary and Macroprudential Policies in Saudi Arabia

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
Interest rates track U.S. rates
8
6
3 Month SIBOR
Repo Rate
Reverse Repo Rate
U.S. Fed Funds Rate
3-Month Deposit Rate
13 Week Treasury Bill rate
4
2
0
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
Liquidity Management by SAMA
(Billions SAR)
300
250
200
150
Excess deposits of banks
Treasury bills held by commercial
banks
100
50
(50)
(100)
9
However, the monetary base is volatile
Contributions to Monetary Base Growth (in percent)
200
40
T-bills and repurchase agreements
Other
NIR less Govt Deposits
Monetary Base (RHS)
150
30
100
20
50
10
0
0
-50
-100
Dec-09
-10
-20
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
10
International comparison of
monetary policy frameworks
11
Heterogeneity in monetary policy
frameworks across oil exporters
Country
Monetary
policy
framework
Country
Monetary
policy
framework
Saudi Arabia
Exchange rate
anchor
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
Other GCC
Algeria
Exchange rate
anchor
Exchange rate
anchor
Azerbaijan
Other*
Brunei
Exchange rate
anchor
Canada
Inflation target
Chile
Inflation target
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
12
25
Average real expenditure growth, 2000-13
10
Volatility of growth, 2000-13
8
6
Non-GCC
Avg
4
GCC Avg
2
Saudi
Arabia
0
0.0
5.0
10.0
Average growth, 2000-13
15.0
20
15
GCC Avg
10
Non-GCC
Avg
5
Saudi
Arabia
0
0.0
5.0
10.0
15.0
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
0.03
0.05
Response of Non-oil Output
from shock to Credit
0.04
Response of Credit from
shock to Monetary base
0.03
0.02
0.02
0.01
0.00
1
0.01
2
3
4
5
6
7
8
9
10
-0.01
-0.02
1
-0.01
2
3
4
5
6
7
8
9
10
-0.03
-0.04
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

SAMA has used several macroprudential
instruments (MPI) in the past…
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
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
45%
40%
Credit Growth
Oil Price Growth (RHS)
100%
80%
35%
60%
30%
25%
40%
20%
20%
15%
0%
10%
-20%
5%
-40%
0%
-5%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014
-60%
Sources: Country authorities; and IMF staff calculations.
25
International comparison of
macroprudential policy
frameworks
26
Comparison of toolkit

SAMA toolkit is comparable to other
commodity exporters.
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
27
Countercyclical macroprudential policy is
increasingly the norm
Country
Saudi Arabia
Capital
Liquidity
Exposure


Kuwait
Algeria
Azerbaijan
Sectoral





Brunei
Canada

Chile


Indonesia
Kazakhstan


Malaysia

Mexico

Norway


28
Effectiveness
Cross-country evidence
Sources: Lim et al (2011), International Financial Statistics.
29
2013 - Oct
2013 - Jul
2013 - Apr
2013 - Jan
2012 - Oct
2012 - Jul
2012 - Apr
2012 - Jan
2011 - Oct
2011 - Jul
2011 - Apr
2011 - Jan
2010 - Oct
2010 - Jul
2010 - Apr
2010 - Jan
2009 - Oct
2009 - Jul
2009 - Apr
2009 - Jan
2008 - Oct
2008 - Jul
2008 - Apr
2008 - Jan
2007 - Oct
2007 - Jul
2007 - Apr
2007 - Jan
2006 - Oct
2006 - Jul
2006 - Apr
2006 - Jan
Effectiveness
Canadian Experience
Indicates mortgage
rule tightening
14%
(y/y growth)
12%
10%
8%
6%
4%
2%
0%
Residential mortgage (average at month end)
Sources: Krznar and Morsink (2014), Bank of Canada.
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


SAMA lags GCC & commodity exporters in terms of
FSR, but is planning to publish one soon.
SAMA has developed “internal” macroprudential
dashboard.
Country
Country
First FSR
First FSR
Azerbaijan
2010
Canada
2002
Chile
2004
Indonesia
2003
Kazakhstan
2006
Malaysia
2006
Bahrain
2007
Kuwait
2013
Oman
2013
Mexico
2006
Qatar
2010
Norway
1997
United Arab
Emirates
2013
Russia
2012
South Africa
2004
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 takeaways
Short 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