RIYADH, 4 October 2004 — All in all, this was a good week for global financial markets even as oil prices continued to set new records. Markets were buoyed by expectations of good corporate profits as the 3rd quarter earnings season started and some better-than-expected US economic data were released. The key economic indicator last week was the Institute of Supply Management (ISM) index of manufacturing activity. Although, the headline index fell to 58.5 in September from 59 percent in August, in line with expectation, markets were cheered by the large jump in the employment component of the index from 55.7 in August to 58.1 in September. This suggests that the US payroll number for September, to be released this Friday, may bring good news. Markets were expecting 155,000 new jobs to be created in September compared to 144,000 in August.
Japan’s strong Tankan business survey also helped fuel the global market rally. The quarterly Tankan’s diffusion index (DI), which is the difference between the percent of respondents who are positive minus those who are negative about their industry prospects, rose to a 13-year high of 26 in September from 22 in June.
Even European markets ignored poor data from the UK and euro zone. The dollar rallied to these events on Friday, but it was not sufficient to wipe out its earlier losses for the week. Global treasury yields also rose as investors unwound bets that the US economy would weaken enough to prompt a slowdown in US Federal Reserve rate increases.
Markets are now focused on the annual Group of Seven (G-7) largest industrialized countries’ meeting and the joint IMF-World Bank annual meeting. Three items that promise to be on the table are record high oil price, the weak US dollar and China’s fixed exchange rate policy. These three items together have the power to derail today’s already limping global economic recovery. High oil prices will hurt key oil importing nations like the US, Japan and euro zone.
China is under increasing international pressure, including from the IMF, to unpeg its currency to the dollar. Its official rate is considered undervalued and negative for major trading partners like the US and Japan.
Locally, SAMA’s latest data paint a vibrant picture for the Saudi economy and banking sector. Surging demand for bank lending and the banking sector’s focus on the consumer segment of the market has led bank loans to outstrip deposit growth in the last one year. In the last six months ending in August alone, bank lending grew SR49 billion, while total deposits grew SR32 billion — a SR17 billion difference! This is the first year in the last three years that loan growth has outstripped deposit growth. Growth in lending is good not only for the banks but also for the economy provided they are used for real investment instead of purchasing financial assets or imports from abroad. Data on imports are not yet available, but some of the borrowing seems to be going into the stock market.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)