Saudi monetary base soars in Q1

Money supply and other monetary aggregates in Saudi Arabia recorded one of their highest increases in the first quarter of 2011 following a sharp rise in deposits with banks mainly because of the disbursement of a two-month salary to employees in the Gulf country on orders by King Abdullah.

Figures by Saudi Arabia’s largest bank, National Commercial Bank, showed the monetary base leaped year-on-year by nearly 24.7 per cent to reach SR276.1 billion at the end of the first quarter, the highest level on record.

The money supply followed suit with a double-digit growth rate of 13.8 per cent, the first time since the end of 2009, it said in a study sent to Emirates 24/7.

The increasing growth in monetary aggregates was mainly driven by the upsurge in demand deposits and the increase in excess reserves with the Saudi Arabian Monetary Agency (SAMA), the country’s central bank, the report showed.

Citing official data, it said banks’ net foreign assets soared by around 25.2 per cent Y/Y to reach an all time high of SR127.1 billion.

It attributed the growth to the increase in assets due from banks abroad by SR12.8 billion, an upsurge in investment abroad by SRseven billion to a record high level of SR125.4 billion, a plunge in liabilities due to foreign banks by SR3.4 billion; and a drop in liabilities due to branches abroad by SR10.7 billion.

Banks’ claims on the public sector increased by SR6.3 billion in the first quarter of 2011 compared to the corresponding quarter last year.

Although banks’ credit to public sector enterprises declined by 2.1per cent, the growth came from significant treasury bill issuances.

During the previous 12 months, SAMA issued T-bills worth SR19.5 billion to replace matured government bonds, which amounted to SR12.6 billion and manage liquidity in the Saudi economy, according to NCB.

The report showed private sector credit grew by 6.5 per cent in the same period, the highest growth rate since the second quarter of 2009.

The bulk of the growth was attributed to a robust increase in credit to the manufacturing, construction and commerce sectors, which jumped by nearly 23.6, 16.1, and 4.5 per cent respectively.

The uptick in broad money measure (M3) was mainly driven by the increase in total deposits by 13.3 per cent Y/Y to reverse the downward trend and record the same growth level as in the third quarter of 2009, the report said.

The growth in total deposits was attributed to the upsurge in demand deposits by 28.2 per cent Y/Y; and the increase in quasi-monetary deposits by 7.3 per cent Y/Y, driven by a rise of SR8.4 billion in foreign currency deposits.

On the other hand, time/savings deposits acted as a drag on money supply given its negative trajectory, declining by 5.1 per cent Y/Y. The share of demand deposits continued its rise, reaching 55.5 per cent of total deposits, the highest level in the last 32 years, which underscores the preference for liquidity, given the low interest rate environment and the lack of other investment options.

“The phenomenal increases in deposits, excess reserves, credit, and net foreign assets can be explained by the conferring of a two salary allowance to all Saudi public sector workers and students by royal decree,” the report said.

“Some private companies and organizations in the Kingdom followed suit and granted their Saudi workers two-salary allowance, which injected a tremendous amount of money into the economy.”

Turning to inflation, NCB said the rate declined Y/Y to five per cent in the first quarter of this year, driven by easing inflationary pressures in housing and food. “The housing market is still the main contributor to inflation, as housing recorded an annual growth rate of 8.2 per cent… yet it has been following a downward trend since the third quarter of 2008,” it said.

Food inflation declined as well to reach nearly 5.9 per cent Y/Y as world prices for food remained relatively stable after peaking in February 2011, when the UN’s Food and Agriculture Organization (FAO) price index recorded its highest reading since it started measuring food prices in 1990, the report said.

“Additionally, new letters of credit increased by 12 per cent annually following a contraction of 0.7 per cent during the previous month, with a strong gain in machinery at 53.5 per cent on an annual basis, indicating a boost to the manufacturing sector,” the report added.

“Going forward, we do see excess liquidity as challenging for banks that will have to improve utilization and for the Saudi Arabian Monetary Agency (SAMA) that will have to anchor inflationary expectations.”

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