Saudi Monetary Indicators for August 2010

September 1, 2010

Editor’s Note:

Each month Banque Saudi Fransi takes a look at the latest monetary indicators provided by the Saudi Arabian Monetary Agency (SAMA) to produce its “Monetary Indicators” report. The key findings for August include: a growing disconnect is emerging between money supply growth and inflation; private sector credit is showing a tempered turnaround, but little momentum is evident as banks continue to practice risk aversion; the shift toward demand deposits continues; and net foreign assets grew an annual 9.1% in July, the fastest jump in 14 months. Today we are pleased to provide the August 2010 “Monetary Watch” and thank Dr. Sfakianakis and his staff for sharing it with you on SUSRIS.

[Visit HERE for the complete report including insightful charts and graphs.]

Monetary Watch – August 30, 2010
Dr. John Sfakianakis
Banque Saudi Fransi

Monthly monetary indicators
Little impetus in July loan growth; money supply and deposits decline

Private sector credit growth up very slightly to 3.4% in July, little momentum
Broad money supply growth slows as time and savings deposits drop
Inflation hits 17-month peak despite lack of monetary pressures
Shift to demand deposits continues; they now account for 52.7% of total deposits

The speed of Saudi Arabia’s economic recovery has yet to gain any notable impetus, with July data of the Saudi Arabian Monetary Agency (SAMA) showing only a slight pick up in annual private sector credit growth, while growth in bank deposits and money supply slowed from the month earlier. Stronger oil prices during the summer have nonetheless supported the kingdom’s fiscal position. In July, SAMA net foreign assets grew 9.1% year on year, including a 0.5% monthly rise, to SR1.56 trillion ($416.98 billion), the fastest pace of growth in 14 months. Oil prices averaged $76 a barrel in July.

Despite the lack of monetary pressures, however, inflation is beginning to re-enter the radar screen. The kingdom’s inflation rate jumped to a 17-month peak of 6% in July, stemming from rises in food prices, rents and general goods and services.

Saudi bank claims on the private sector – a measure that includes bank credit and investments in securities – expanded 4.9% in July, up from 4.4% in June and the fastest rate of growth in more than a year. The bank credit component accelerated to an annual 3.4% rate of growth, up from 3% in June. Bank lending has gradually gathered speed for the first seven months of 2010 from virtually no annual growth in January to a cumulative rise of 3.2% by July.

Put into context, loan growth is very slowly recovering from a low base and is negligible when compared with rates exceeding 20%, and often 30%, in 2008. While they do boast ample liquidity, Saudi banks continue to be wary about extending new corporate credit as they continue to take provisions to guard against possible non-performing loans. In July, bank claims on the private sector grew 0.6% from June, slightly below the month-on-month rate of 0.9% recorded in June. There has, therefore, been very little credit growth momentum despite government efforts to push ahead with strategic infrastructure projects. Bank claims on the public sector increased almost 4% in the month to July, following three months of contractions. The SR205.69 billion in public sector claims were still down 1.5% from the year earlier. New loan growth in July was largely comprised of facilities carrying short-term maturity (less than one year) . That category grew 2.4%, while medium and long term credit declined.

The exception to passive loan growth appears to be consumer lending. Saudi banks have been looking to boost their retail banking portfolios to tap into the Gulf region’s strongest domestic demand story. The Saudi population, according to the latest census numbers, stood at 27.1 million in early 2010 – more than 60% of the regional total.

The pace of Saudi consumer lending growth picked up in the second quarter, reaching almost 10% compared with 7.2% in the first quarter, according to SAMA data. In the three months to June 30, real estate finance surged 30% from the year earlier while auto finance was up 6.2%. Credit card lending, by contrast, fell 5.2% over the same period, as banks are carefully assessing their client base and risk profile.

Focus on demand deposits

In July, broad money supply (M3) contracted slightly (-0.07%) from June, while the annual rate of growth fell to 2.3%. M2 money supply growth also fell to 5.1% in July from 6.9% in June. The slowdown in money supply growth can be linked to a 4.7% monthly drop in time and savings deposits in July. M1, reflecting liquid funds including currency outside of banks and demand deposits, grew 2.1%.

We continue to expect growth in broad money supply of 7% in 2010 as higher rates of credit growth and decent macro-economic continue to filter through into the wider economy. M3 had witnessed its biggest monthly improvement in 16 months in June. It is likely that money supply will resume growth following Ramadan and the Eid holiday, which ends in mid-September. Should money supply growth remain at an annual 2%-3%, however, this could over time be an indicator that the economy is poised for lower-than-expected growth. We still expect real economic growth of 3.9% this year on greater oil sector expansion and investments and a pick up in the government and private sectors compared with last year, when growth was a low 0.6%. High government spending is not having an immediate pass through effect in money supply and is not, hence, generating any direct inflationary pressures.

For months, there has been a notable shift of funds into non-interest bearing demand deposits in favour of interest-bearing time and savings deposits. Some 52.7% of total bank deposits in Saudi Arabia were held in demand deposits at the end of July, compared with 41.8% at the beginning of 2009. Between January and July, demand deposits grew 14.8%, while time and savings deposits declined 10.4%. Saudi banks’ loan-to-deposit ratio – which had fallen as low as 78.4% in December – rose slightly to 80.8% in July from 80.5% in June. In late 2008, the ratio surpassed 90%.

SAMA has kept interest rates unchanged for more than a year; its repurchase rate has remained steady at 2% since January 2009 and its reverse repurchase rate at 0.25% since June 2009. This policy remains relevant and consistent with the lack of momentum in private sector credit growth as SAMA continues to send a signal to banks to elevate the pace of loan growth, necessary to support a balanced economic recovery. Bank profitability continues to be subdued in the kingdom as lenders set aside provisions for possible non-performing loans and adopt cautious attitudes toward new lending. As of July, cumulative bank profits were down 12.1% year on year, SAMA data show. The government, in the meantime, is shouldering a great deal of the financing burden for strategic energy and infrastructure projects by granting interest-free loans to keep projects on track.

Banks reduced their holdings in the central bank’s reverse repo window by 25.3% in July, a drop of almost 20% from June. Their foreign asset holdings in the same month rose 23.5%.

Furthermore, there is little that SAMA can do with monetary policy manoeuvring at this stage to quell accelerating price pressures that led inflation to accelerate to 6% in July from 5.5% in June – the highest inflation rate since February 2009. Food and beverage inflation rose to 7% in July from less than 1% last December, stemming from both higher global commodity prices and rising domestic demand as consumers prepared for the Islamic month of fasting which began Aug. 11. Anecdotal evidence shows food prices rose sharply for many items, such as dates, which are up about 10% and meat, which has witnessed rises of 7-15%. Food and beverages have the biggest weighting on the index of 26%, followed by rents and utilities at 18%. Rental inflation, while still a steep 8.9%, has been decelerating year-on-year for past seven months.

The main thrusts behind accelerating inflation, hence, have been food prices and other goods and services, which rose an annual 9.1% in July. As inflation rates rise, money supply growth has declined, thus pointing to a disconnect between monetary pressures and inflation rates.

[Visit HERE for the complete report including insightful charts and graphs.]

Disclosures and disclaimers in the original document
Source: Banque Saudi Fransi
Contact Info:
Dr. John Sfakianakis – Chief Economist
Tel: +966 1 289 1797 – Email: johns@alfransi.com.sa
Turki A. Al Hugail – Economic Research Analyst
Tel: +966 1 289 1163 – Email: talhugail@alfransi.com.sa
Daliah Merzaban – Economic Analyst
Tel: +971 4 428 3608 – Email: dmerzaban@alfransi.com.sa

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