AMMAN, 10 November 2003 — Liquidity is measured by money supply or the amount of money circulating in the economy. There are various definitions of money supply, the narrow definition (M1) is currency in circulation plus checking deposits in the banking system. The broader definition (M2) is equal to money supply (M1) plus time and savings deposits. In Jordan, money supply (M1) is up 18 percent from the beginning of the year on top of the 9 percent recorded in 2002. In Saudi Arabia, the growth in money supply (M1) exceeded 18 percent in the past 18 months, and it remained between 12 percent and 25 percent in the other Gulf states, compared to less than 5 percent in 1997 and 1998.
The availability of excess liquidity in the economy, measured by high growth rates in money supply could either be inflationary or a contributing factor to economic activities. In economies where inflation rates have been relatively stable in the past year, such as Jordan, the Gulf countries and Tunisia, excess liquidity has been strongly correlated with higher GDP growth.
The main determinants of liquidity in the region are the trickle down of oil revenues into higher government expenditures, rapid expansion in consumer and corporate lending, foreign aid, repatriation of capital from abroad and higher foreign direct and portfolio investments. Oil price so far this year has averaged around $28.8 a barrel for Brent crude, compared to an average of $25 a barrel in 2002 and $24.50 a barrel in 2001. Average prices for 2003 will exceed the record highs achieved in 2000 of $28.40 a barrel. Higher prices and larger oil production levels boosted revenues and overall government expenditures of the Gulf countries and added to the growth of domestic liquidity.
Strong oil revenues in the Gulf usually lead to a rise in the level of regional liquidity, through higher remittances, better export opportunities to the GCC markets, a surge in direct investment flows from the Gulf to the non-oil Arab countries and more regional tourism.
During periods of strong economic growth conditions in the Gulf, domestic demand would surge leading to higher expenditures on imports including those coming from the neighboring Arab countries. Remittances of Jordanian, Egyptian, Lebanese and Palestinian workers among others in the Gulf to their respective home countries would rise as well reflecting both higher income and larger savings of these expatriates. A surge in direct and portfolio investments of Gulf nationals and corporates in the other Arab countries has also been recorded fueling a boom in the real estate and equity markets there. Finally, as increasingly more tourists from the Gulf change their destinations from the US and Europe to Egypt, Jordan, Lebanon and Syria, the money they spend in these countries will further contribute to conditions of excess liquidity.
The region’s private sectors have benefited as well from lower cost of borrowing, rapid expansion in consumer lending by commercial banks, and a general rise in consumption reflecting the return of confidence to the region. Recent confirmation from the US that the policy of monetary easing is not likely to be reversed any time soon is welcome news to the region where domestic interest rates are determined by dollar rates. This will further facilitate credit expansion and direct more liquidity to the local stock markets.
Equity markets have surged in almost all Arab countries with the increase from the beginning of this year till now ranging from 150 percent in Egypt, to 87 percent in Kuwait, 62 percent in Saudi Arabia, 60 percent in Qatar, 38 percent in Oman, 37 percent in Jordan and 28 percent in UAE. The average daily trading turnover have almost doubled this year compared to levels recorded in 2000 and 2001.
The rise in the stock markets together with the solid upturn in real estate prices boosted the “wealth effect” of consumers and reflected positively on domestic demand and internal liquidity.
Capital repatriated from abroad rose in the past two years adding to the stock of excess liquidity in the region. Latest data from the Bank of International Settlement show that Saudi and other Gulf citizens have been moving part of their funds out of the international banking centers. Starting in mid-2001, Arab investors, have been diversifying their international portfolios in response to falling interest rates, tumbling of equity markets and threats facing the security of their investments abroad. For example, total deposits at Saudi banks rose by 22 percent in the past 18 months from SR221.8 billion ($59.2 billion) at the end of 2001 to SR270.1 billion ($72 billion) by July this year. Official foreign reserves of Lebanon and Jordan rose to an all-time high of $12 billion and $5.2 billion respectively.
In Jordan, the additional aid of $500 million that came this year from the US and the free oil of around 100,000 barrel per day supplied by Saudi Arabia, Kuwait and UAE, provided the much needed support to the budget this year and contributed to higher liquidity in the Kingdom. Returnees from Kuwait received $70.64 million in reparations from the United Nations so far this year, with $12 million expected before the end of 2003 thus raising the total amount received so far to $1,142 million. During the first six months of the year, the central bank absorbed an additional JD356 million from the banking system by issuing certificates of deposits (CDs) bringing the total outstanding CDs to JD2 billion.
Conditions of excess liquidity in the region are likely to prevail well into 2004, supported by strong economic performance, access to credit at low rates and decreased regional uncertainty. High oil revenues will make it possible for Gulf governments to follow expansionary fiscal policies. For the non-oil Arab countries, remittances, aid and regional tourism would compensate for higher oil prices. In the past, most of the excess liquidity in the region used to seek investment opportunities in the international stock and bond markets. But with the high volatility and generally weak performances of these markets and threats facing the security of Arab investments abroad, much of this wealth will be looking for opportunities closer to home.
(Henry T. Azzam is chief executive officer at Jordinvest.)