But fail to spur bank lending while foreign assets swell
A two-month salary ordered by King Abdullah of Saudi Arabia for public and private sector employees as part of a massive financial allowance sharply boosted domestic liquidity but failed to spur bank lending.
Money supply in the world's oil superpower leaped in April to its highest level in nearly two years while consumer indicators showed generous government and industry handouts this year had boosted consumer confidence, a key bank in the Gulf Kingdom said in a study sent to Emirates 24/7.
High oil prices, which have shot above $100 over the past weeks because of regional unrest, also pushed foreign assets to a fresh record.
"Yet, these positive indicators were not reciprocated by higher growth in bank lending to the private sector, which tapered off slightly as a likely
consequence of the amplified focus on government-led development," said the study, authored by BSF chief economist, John Sfakianakis.
The study said Saudi Arabia's 12 commercial banks were hit with a "torrent" of new liquidity after the government paid out about SR53 billion in bonuses to civil service employees, a figure that excludes similar payouts offered by private sector employers and banks.
Many private companies doled out two-month bonuses to staff in April, following in the footsteps of their state-owned counterparts a month earlier, BSF said.
Accordingly, broad money supply jumped 17.2 per cent to SR1.18 trillion in April, the highest rate of growth since April 2009, it said, adding that the level, if sustained, would contribute to inflationary pressures in the kingdom.
M2-- which includes demand deposits, currency outside banks, and time and savings deposits--also swelled by 17.8 per cent, a 28-month peak.
The study expected money supply growth to slow down in the coming months due to the "one-off" nature of the hand outs. But the study said it believed the implications of the massive rise in public spending power could be felt for some months in the cost of consumer goods.
Monetary base, a measure that reflects highly liquid currency in banks and held by the public, soared 26.5 per cent in April, the report showed.
"Most citizens were prone to keeping their funds in non-interest-bearing demand deposits, favoured due to their accessibility and a lack of appeal of savings deposits due to low interest rates," it said.
Demand deposits climbed 33 per cent year on year in April, representing 57.4 per cent of total deposits, up from just 48 per cent at the start of 2010.
"Recurrent payments prior to the summer break could compel businesses to place funds in demand deposits to keep them easily deployable," it said.
"The block of state initiatives unveiled in the first quarter to support citizens underpinned the government's willingness to continue to drive the economy."
According to the study, this enthusiasm has not yet led to an extensive improvement in the private sector's investment appetite.
Private bank credit, excluding investments in securities, expanded 6.4 per cent in April, edging lower from growth of 6.5 per cent a month earlier, which had been the highest since May 2009, the figures showed.
"The pace of month on month expansion in private credit also decelerated.
Credit to public sector enterprises similarly dropped 5.8 per cent in the month to April 30. With all of the new deposits, banks are well-capitalised to be able to extend new loans, although they continue to apply more stringent rules for loan extensions. Private sector businesses meanwhile are not expanding their businesses as much as they had been prior to the financial crisis."
BSF said it believed such factors have contributed to the temperate pace of improvement in the loan environment.
It noted that most of the loans that are being granted are longer-term in tenure, indicating that project financing among larger companies, particularly those working alongside the government, is picking up.
Loans maturing in three years or longer, classified as long-term, grew 15.9 per cent in April, compared with 9.9 per cent growth in medium-term credit (one to three years) and 0.9 per cent for short-term lending (less than one year).
"In an environment where lending is weak and deposit growth is strong, it is not surprising to see the loan-to-deposit ratio sag to a low 74.8 per cent in April, down from 82.3 per cent a year earlier," BSF said.
"Banks are holding a lot of money abroad, with their net foreign assets growing by 20.8 per cent in April to SR121.6 billion. They are also becoming profitable as they take fewer provisions and lending, while slow, picks up relative to a year ago....cumulative bank profits rose 6.5 per cent in April, their second month of gain after almost two straight years of declining."
© Emirates 24|7 2011
