Saudi money supply growth slows

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JEDDAH - Saudi Arabian M3 money supply growth, an indicator of future inflation, slowed to a more than seven-year low in July.

M3 money supply growth, which includes demand deposits and currency outside banks, eased to 2.3 percent in July, compared with 3.4 per cent the previous month, the central bank said on its website on Monday. July bank claims on the private sector advanced an annual 4.9 per cent compared with 4.4 percent in June, according to the central bank data.

Credit growth remains "weak although positive," said Monica Malik, Dubai-based chief economist at EFG-Hermes Holding SAE.

"The slowing in total deposit growth, with the negative real interest rates, is also impacting money supply growth."

The world's largest oil supplier is spending more than $400 billion over five years to strengthen the economy and help finance infrastructure projects. The Saudi Industrial Development FundSaudi Industrial Development Fund has provided loans to companies seeking to finance expansion projects with tighter lending conditions in the Arab world's biggest economy.

M1 money supply growth, a narrower measure that excludes longer-term deposits and money market funds, slowed to 20.6 percent in July from 21.2 percent in June, the Saudi Arabian Monetary AgencySaudi Arabian Monetary Agency said. M2 money supply growth, which includes time and savings deposits, slowed to 5.1 percent in July from 6.9 per cent in June.

Economic activity is expected to increase toward the end of the year with the end of the summer and of Ramadan, Malik said. "This is likely to see some pick up in money supply growth as government spending goes up again, and we also expect to see stronger private sector credit growth," she said.

Banque Saudi Fransi said in its report Monday on Monetary Watch that in July, broad money supply (M3) contracted slightly (-0.07 percent) from June, while the annual rate of growth fell to 2.3 percent. M2 money supply growth also fell to 5.1 percent in July from 6.9 percent in June. The slowdown in money supply growth can be linked to a 4.7 percent monthly drop in time and savings deposits in July.

However, M1, reflecting liquid funds including currency outside of banks and demand deposits, grew 2.1 percent, the bak said.

The report forecast growth in broad money supply of 7 percent 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 percent-3 percent, however, this could over time be an indicator that the economy is poised for lower-than-expected growth, the report noted.

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 percent year on year, SAMASAMA 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 percent in July, a drop of almost 20 percent from June. Their foreign asset holdings in the same month rose 23.5 percent.

"We still expect real economic growth of 3.9 percent 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 percent. High government spending is not having an immediate pass through effect in money supply and is not, hence, generating any direct inflationary pressures," Dr. John Sfakianakis, BSF chief economist, said in the report.

Saudi banks' loan-to-deposit ratio - which had fallen as low as 78.4 percent in December - rose slightly to 80.8 percent in July from 80.5 percent in June. In late 2008, the ratio surpassed 90 percent.

SAMASAMA has kept interest rates unchanged for more than a year. Its repurchase rate has remained steady at 2 percent since January 2009 and its reverse repurchase rate at 0.25 percent since June 2009.

"This policy remains relevant and consistent with the lack of momentum in private sector credit growth as SAMASAMA continues to send a signal to banks to elevate the pace of loan growth, necessary to support a balanced economic recovery," said Dr. John Sfakianakis, BSF chief economist.

Furthermore, there is little that SAMASAMA can do with monetary policy maneuvering at this stage to quell accelerating price pressures that led inflation to accelerate to 6 percent in July from 5.5 percent in June - the highest inflation rate since February 2009. Food and beverage inflation rose to 7 percent in July from less than 1 percent last December.

Anecdotal evidence shows food prices rose sharply for many items, such as dates, which are up about 10 percent and meat, which has witnessed rises of 7-15 percent. Food and beverages have the biggest weighting on the index of 26 percent, followed by rents and utilities at 18 percent. Rental inflation, while still a steep 8.9 percent, 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 percent in July. As inflation rates rise, money supply growth has declined, thus pointing to a disconnect between monetary pressures and inflation rates.

In July, SAMASAMA net foreign assets grew 9.1 percent year on year, including a 0.5 percent monthly rise, to SR1.56 trillion ($416.98 billion), fastest pace of growth in 14 months.

© The Saudi Gazette 2010