Saudi companies appear to be investing heavily in the domestic non-oil economy at the expense of their deposits with banks, with growth in such deposits slowing down through 2012, according to a key bank in the Gulf Kingdom.
The slowdown allied with a pick-up in domestic credit to lift the loan-to-deposit ratio beyond the level required by the Saudi Arabian Monetary Agency (SAMA), central bank, set at 85 per cent, the Saudi American Bank Group (SAMBA) said in a study.
“There is still some tightness in the local financial system, reflecting a scarcity of corporate deposits, but this appears to be abating and might in any case reflect strong investment growth in the non-oil economy,” it said.
It said that local firms continue to report strong growth in new orders, with exchange rate movements helping make non-oil exports more competitive.
However, the report added, the flip side is an increase in import costs which firms are finding difficult to absorb.
SAMBA said it had extended its macroeconomic forecast and that it now expects average real GDP growth of just over 3.5 percent in 2013-2014.
Activity in the nonoil economy should continue at a 5 percent pace, it said.
“Corporate deposits are still scarce, but tightness points to buoyant non-oil economy
Mild stresses in the Saudi financial system have persisted. The loan-deposit ratio has crept up, and it even exceeded its SAMA-mandated level in August and September, though has since fallen back somewhat,” the study said.
Its figures showed the main interbank rate, SAIBOR, has ticked up and that the SR-USD 12 month forward spread is now in positive territory, indicating that markets think that the riyal is slightly overvalued.
“These stresses largely reflect two factors: accelerating loan growth to the private sector and a scarcity of deposits,” the report said.
It showed lending to the private sector grew at an average 15.5 percent in the third quarter, reflecting a buoyant nonoil economy, with large infrastructure commitments.
But it noted that deposit growth has not kept pace, growing at a more sedate 11.5 percent over the same period.
“This in turn reflects in part more discerning corporate customers looking for a higher yield on their deposits: the deposit rate spread over SAIBOR is understood to have widened in September and October, but has since narrowed somewhat,” it said.
“More fundamentally it points to a lively private sector where cash is being invested—usually involving imports of capital machinery--rather than kept in the bank. Thus, although a couple of banks are understood to be selling some of their assets in order to bring their loan-to-deposit ratios into line with mandated limits, the stresses generally reflect a positive story where domestic demand is buoyant.”
SAMA’s figures showed total deposits with Saudi Arabia’s 12 banks swelled by around SR105 billion in the first 10 months of 2012. But a large part of the increase was in government deposits, with its demand deposits surging from SR29.4 billion at the end of 2011 to SR47.8 billion at the end of October 2012. Its time and savings deposits grew from SR120 billion to SR135 billion and foreign currency deposits from SR63.6 billion to SR78 billion. Corporate and individual demand deposits soared from SR611 billion to SR661 billion but time and savings edged up from SR185 billion to SR189 billion. Foreign currency deposits also slightly rose from SR73 billion to SR79 billion.