According to a new report from Bank of America, Saudi Arabia is facing pressure due to a liquidity crisis as the movement of bank deposits slows down, and the economy is affected by the war between the US and Israel against Iran.
In a client memorandum for Bank of America, it is noted that Saudi Arabia is battling 'contagion' caused by the lack of liquidity in the UAE and the rapid decline of the kingdom's own economy. This report was published on Bloomberg on Tuesday.
Saudi banks are feeling the effects of the situation in the UAE, which has also faced consequences from the Iranian conflict and tighter liquidity conditions. Saudi Arabian banks are closely linked to their neighbors in the Emirates, as a significant amount of interbank transactions contributes to increased deposits in Saudi banks.
Simultaneously, the Saudi Arabian economy is under strain, and state entities are making withdrawals from Saudi banks. Meanwhile, the demand for loans remains high, which effectively increases the cost of money in Saudi Arabia.
The liquidity deficit is particularly noticeable for Saudi Arabia because its currency is directly pegged to the US dollar, as are the currencies of other Persian Gulf countries, including the UAE, Qatar, Oman, and Bahrain. The central banks of the Gulf countries cannot inject additional liquidity into their markets, unlike the US, Europe, and Russia, because their currencies are pegged to the dollar, and interest rates follow those set by the US Federal Reserve.
Oil Export Recovery
Although Saudi Arabia has avoided the worst consequences of the war between the US and Israel against Iran, its economy still depends on smaller Gulf countries. For example, the UAE is Saudi Arabia's largest foreign direct investor.
Recently, the kingdom's economy was shaken by the ceasefire in Yemen. Saudi Arabia had been subjected to attacks by Houthi cruise missiles and drones targeting energy infrastructure, airports, and major commercial buildings. Earlier this week, Houthis launched an air strike on the Aramco tower in Riyadh.
Liquidity pressure arises even amid the recovery of Saudi Arabia's oil exports to pre-war levels. Saudi Arabia reported to the Organization of the Petroleum Exporting Countries that in October it produced 10.6 million barrels of oil per day (bpd), which is higher than the September figure of 8.372 million barrels per day.
This figure was the highest production level for Saudi Arabia since February, before the US and Israeli attacks on Iran. The East-West pipeline, which ends at the port of Yanbu on the Red Sea, allowed Saudi Arabia to bypass Iranian attacks in the Strait of Hormuz; however, according to Riyadh, this pipeline was subject to attacks by Houthis and militias in Iraq. The last attack on the pipeline occurred on Monday.
