Monetary and Macroprudential Policies in Saudi Arabia Ahmed - - PowerPoint PPT Presentation

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

• ver 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

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Peg limits SAMA’S ability to set interest rates independently

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

100 150 200 250 300 Excess deposits of banks Treasury bills held by commercial banks

Liquidity Management by SAMA

(Billions SAR)

9

However, the monetary base is volatile

• 20
• 10

10 20 30 40

• 100
• 50

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 exporters

Country 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

• utcomes compare well

Saudi Arabia GCC Avg Non-GCC Avg

2 4 6 8 10 12 0.0 5.0 10.0 15.0 Average growth, 2000-13 Volatility of growth, 2000-13

Saudi Arabia GCC Avg Non-GCC Avg

5 10 15 20 25 0.0 5.0 10.0 15.0 Average real expenditure growth, 2000-13 Average inflation, 2000-13

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Empirical analysis of monetary policy in Saudi Arabia

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Monetary transmission channels

 Interest rate channel

 policy rates impact economic activity through cost

• f 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.

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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 from

shock 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

• n 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

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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)

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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

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Saudi macroprudential toolkit

Capital T

• ols

Leverage Ratio Provisions Liquidity T

• ols

Loan to Deposit Ratio Liquidity Requirements Sectoral T

• ols

Concentration Limit Loan to Value Ratio Debt to Income Ratio Exposure T

• ols

 SAMA has used several macroprudential

instruments (MPI) in the past…

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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

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Comparison of toolkit

Capital T

• ols

Leverage Ratio Provisions Liquidity T

• ols

Loan to Deposit Ratio Liquidity Requirements Asset Maintenance Ratio Sectoral T

• ols

Concentration Limit Loan to Value Ratio Debt to Income Ratio Sectoral Capital Buffers Limits on Domestic Currency Loans Exposure T

• ols

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 

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Effectiveness

Cross-country evidence

Sources: Lim et al (2011), International Financial Statistics.

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Effectiveness

Canadian Experience

Sources: Krznar and Morsink (2014), Bank of Canada.

0% 2% 4% 6% 8% 10% 12% 14% 2006 - Jan 2006 - Apr 2006 - Jul 2006 - Oct 2007 - Jan 2007 - Apr 2007 - Jul 2007 - Oct 2008 - Jan 2008 - Apr 2008 - Jul 2008 - Oct 2009 - Jan 2009 - Apr 2009 - Jul 2009 - Oct 2010 - Jan 2010 - Apr 2010 - Jul 2010 - Oct 2011 - Jan 2011 - Apr 2011 - Jul 2011 - Oct 2012 - Jan 2012 - Apr 2012 - Jul 2012 - Oct 2013 - Jan 2013 - Apr 2013 - Jul 2013 - Oct

Residential mortgage (average at month end)

Indicates mortgage rule tightening

(y/y growth)

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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 Emirates 2013 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

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Conclusion

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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

• perations 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

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Questions?

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