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May 27 2007

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SAMA's March data show large increase in liquidity

This represents a 3.4% growth from February to March, or an annualized growth rate of over 40%. It is notable, however, that similar large increases were also evident in previous years (March 2006 and 2005 as well).

A look at the components of M3 show that all grew in March (table below). Demand deposits show its sixth monthly rise in March, growing by SR6 billion (a combined rise of over SR31 billion since last October). Time and savings deposits, except for a one-off decline in January 2007, grew for eight months since June 2006. In March 2007, it increased by SR8 billion for a total combined increase of SR48 billion since June 2006. Quasi-money deposits also increased in March by SR8 billion but this comes after a huge (SR13 billion) decline in the previous month. Thus, liquidity growth in March is again "firing on all cylinders".In the past, we introduced a number of charts to view trends in different ways ("different views of earth from space"). We present them all for the technically-minded, to show how they relate to each other and also to add to your arsenal of visual analytical tools. The first chart is the starting off point: it shows M3 for the whole period under analysis (Jan 2004 to March 2007) in a line chart. The slope of this curve at any point shows monthly change for the corresponding month (e.g. line segment BC). The second chart "slices off" each year and stacks them on top of each other (pulling the beginning of each year curve all the way to the left). The slopes of these curves continue to show month-to-month changes, but now the chart illustrates a new piece of information: the vertical gap between any two curves show growth in M3 between the corresponding years at the same point in time (e.g. March-over-March). These vertical gaps thus allow us to focus on trends (e.g., is the gap increasing over time?) instead of seasonal patterns (there is a seasonal increase in M3 every year in March; the curves steepens in March but the gap between the curves do not increase in March). The third chart converts the slopes of the curves (i.e. monthly changes) in the top two charts to vertical bars, thus, making it easier to visualize trends (the vertical bars are larger each March). The fourth chart converts the vertical gaps in the second chart to vertical bars, again, visually easier to identify trends in the percentage change in M3 from its level 12 months ago (a 12-month moving average).

Challenge question: Do these charts suggest any relationship between M3 growth and food price inflation we discussed earlier?

© Riyad Bank 2007