Jun 05 2011
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Bank lending to private sector grows 6.9% in Saudi Arabia
Latest official data show that bank lending to the private sector grew by 6.9 percent in the twelve months to April. This represents a reasonable pickup on the 5.7 percent growth registered in December, particularly given the backdrop of regional political uncertainty.
Private sector credit growth surged during the pre-financial crisis years, reaching 21 percent in 2007 and 27 percent in 2008 (lending growth peaked in June 2008 at an annual rate of 35 percent). The drying up of domestic private sector investment and seizing up of global interbank markets saw a rapid retrenchment in the second half of 2008 and overall credit contracted slightly in 2009. Private credit returned to growth in 2010, but with private investment subdued, the rate was a modest 5.7 percent off a low base, the report said.
However, supply and demand fundamentals appear to be changing. Helped by resolutely brisk deposit growth-recently boosted by additional salary payments - Saudi banks enjoy ample liquidity, with a sector-wide loan-deposit ratio of just 78. Banks are also well capitalized, and with the provisioning cycle having peaked, institutions are looking to regrow their loan books.
According to the Samba report, demand for credit is also much firmer than two years ago. The government's counter-cyclical fiscal stance, which has been reinforced by the additional spending pledges made in February and March has buttressed private sector confidence. Public sector salaries have been increased, which has supported private consumption, while infrastructure spending has also continued to pick up. This in turn has encouraged the private sector to boost its own investment.
The latest Purchasing Managers' Index (PMI) produced by HSBC shows that private sector investment eased a little in the past few months-unsurprisingly, given the regional political context-but remained firmly in expansionary mode at 62.7 (any number above 50 denotes expansion). According to respondents, new business-especially from the government-prompted firms to build up stocks and take on extra staff. Job creation was the most marked since December 2009, with 14 percent of respondents saying that staff numbers in their firm were higher than a month earlier. By company size, larger firms posted a stronger rate of economic activity than SMEs.
The manufacturing sector
The PMI is not disaggregated by sector of activity, but sectoral demand can be broadly identified by quarterly lending data produced by SAMA (Saudi Arabian Monetary Agency). Of the three big sectors - commerce, manufacturing and construction - lending to manufacturing has shown the most vigor over the past twelve months: Net lending to the sector grew by SR18 billion in the year to the end of March, with an SR19 billion gain in the past six months reflecting the general health and expansion plans of the Saudi petrochemicals industry, as well as specific import requirements of other large manufacturers such as Maaden.
Flows to the construction sector have been more modest, but have registered something of a rebound. Net flows to the sector were around SR8 billion in the past twelve months, in contrast to the SR4 billion net contraction recorded in the previous year. In general, lending to contractors has not been as strong as might be expected given the level of construction activity in the Kingdom, but this mainly reflects the fact that contractors are for the most part receiving payments up front (or at least in a timely fashion) and have less call for bridging finance from banks.
Commerce remains the largest sector, with more outstanding credit than the other two combined. The sector covers a wide array of firms, but in general it is more reliant on private than public spending, the report said. Consequently, net flows were weaker during the downturn than to the other main sectors, which benefited from the government's counter-cyclical spending on infrastructure. But flows picked up strongly in the first quarter of this year as firms positioned themselves to take advantage of rebounding private consumption.
One less encouraging aspect of the PMI survey is input prices. The overall index for input costs rose to 58.2 in April, up from 56.2 in March. Of those surveyed, 17 percent said that overall input prices were higher than the previous month. Purchase prices were the main driver, with 22 percent of respondents reporting that purchase prices had increased on the month (none reported a decline), reflecting in large part the increase in global commodity prices.
The outlook for input prices is mixed. The Samba report said commodity prices have cooled in recent weeks-oil and steel quite considerably-and a softer patch for global growth points to continued commodity weakness in the short term. Nevertheless, the cost of imported inputs for Saudi firms is also influenced by inflation among trading partners, which has been tracking up. This mainly reflects the impact of higher commodity prices, but "core" inflation-that is excluding food and energy prices-is also on the rise, albeit from a low base.
The path of the US dollar will also influence input prices. In late May the trade-weighted US dollar index was down around 5 percent from the beginning of the year. The outlook for the dollar (and hence the riyal) is far from clear-cut: Recently, the euro has come under pressure owing to renewed uncertainties about the outlook for euro zone sovereign debt. Nevertheless, the US's accommodative monetary stance-contrasted with the European Central Bank's tightening - could mean renewed dollar weakness in the medium term. German firms exporting to Saudi Arabia (for example) might choose to absorb this exchange rate loss in order to protect market share if they feel that the dollar is likely to recover, but they are unlikely to do this for long if dollar weakness persists, the report added
Saudi firms also face rising staff costs. To date, the increase in staff costs has been modest, but the authorities' decision to award public sector employees a bonus of two months' salary is being replicated in much of the private sector, leading to a likely spike in staff costs in the coming months.
Faced with rising input costs, it is no surprise that firms have attempted to protect margins by raising output prices. The output prices PMI has risen quite sharply in 2011, reaching 54.4 in April, from 52.2 in December. Eleven percent of respondents said their firm had raised output prices in April, compared with just 1 percent reporting lower prices.
Rising input costs
The rising trend in output prices is now beginning to feed through into the consumer price index. This is not obvious from the headline year-on-year data: The overall index edged up only slightly to 4.8 percent in April, from 4.7 percent in March, and is still some way down on the 5.4 percent registered at end-year 2010. Nevertheless, on a month-on-month basis the trend is determinedly upward. The index grew by 0.4 percent in April, following gains of 0.3 percent and 0.2 percent in March and February, respectively.
Much of the increase was food-related, and as noted above, commodity prices might now be stabilizing (or even reversing) suggesting a weaker impulse from food in the third quarter (commodity price changes take time to show up in local prices). But inflation is also being generated by hardening demand: The volume of points of sale transactions (a proxy for retail sales) grew by 31 percent in the twelve months to April, with firmer growth expected in the second half of the year as salary increases and other benefits continue to feed through. Much of this spending will be directed toward imports, but there will also be upward pressure on the price of domestic nontradeables.
As well as higher prices in the shops, inflation is being fed by rental costs. These have been driven up (on a month-on-month basis) by stronger demand for expatriate labor and a still-slow expansion of the domestic housing stock.
The outlook for rents has been clouded somewhat by the authorities' pledge to enhance housing supply, since many Saudi nationals might decide not to enter the rental market in the expectation of being able to afford to buy a house in a year or two. Nevertheless, this dynamic -- if it materializes -- seems unlikely to fully offset the demand for additional expatriate labor (after all, the nonoil economy is expected to grow by around 5.5 percent in real terms this year). Consequently monthly rental inflation seems likely to continue ticking up in the months ahead.
Taken together, these various price pressures suggest to us that Saudi inflation will continue to gather pace for the rest of the year and into 2012. Base effects mean that year-on-year inflation will probably crest in the first half of 2012 before edging down again as more housing comes on line and US monetary policy tightens. Risk to this projection is generated mainly by the uncertain outlook for commodities and the dollar, the Samba report said.
© Arab News 2011
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