RIYADH, 14 February 2005 — Saudi Arabian Monetary Agency (SAMA) just released its December figures, and with it, we have a picture of the full year for 2004.
Broad money supply (M3), which includes currency held by the public and bank deposits (demand, time, savings and quasi-monetary deposits) rose 17.2 percent on a point-to-point December-over-December basis in 2004, despite a 1.5 percent monthly decline in December.
Since point-to-point numbers can inflate growth rates because of one-off events such as the huge growth (8.6 percent) of M3 in November, it is more useful to look at the average growth rate of liquidity for the year. For this, we calculate the average money supply for each year (the arithmetic average of the 12 monthly M3 numbers from January to December) and then calculate the growth rate. This shows a growth rate of M3 of 12.9 percent from 2003 to 2004, which is not as high as the point-to-point rate.
Other indicators are also interesting. Demand deposits grew 21 percent on a point-to-point December-over December basis, but by 16 percent on an average year-on-year basis in 2004. The corresponding numbers for time and savings are 20.5 percent and 13 percent respectively. On the lending side, total bank loans and advances grew 27 percent on an average year-on-year basis in 2004 vs. 34.5 percent growth on December-over-December basis.
On both measures, loan growth outstripped deposit growth in 2004, leading to a loan-to-deposit ratio of 74 percent at the end of 2004 vs. 64 percent in December 2003 — for private sector loans only. On an average basis, 2004 growth of broad money supply was marginally higher than that of 2003 (12.9 percent vs. 12.5 percent) and 3 percentage points higher than that of 2002 (9 percent).
Secondly, M3 grew more than non-oil GDP in 2004 (13 percent vs. 9 percent), according to latest government’s estimates. The difference (4 percent) measures mainly the drop in the “income velocity of money supply”, which reflects essentially the “efficiency” of money in generating income.
Saudi Arabia’s income velocity of M3 has fallen every year since 1996, from 1.47 to 1.18 in 2003. This translates into an annual average rate of fall of about 3 percent per year. This decline in the income velocity of money is an indicator of the increasing sophistication of the financial system in economic activity and financial disintermediation. It essentially means that less and less money (or bank loans) are needed to produce a given level of income, i.e., non-bank loans and credit are increasing in importance.
The slower growth of non-oil GDP relative to money supply is also indicative of strong growth in the Kingdom’s asset markets, primarily stocks and real estate. The Saudi stock market has reached a new all-time record as liquidity continues to pour into domestic shares and real estate.
Globally, this was a good week for equities and the US dollar, while long-term interest rates continued to fall in US and Europe as the recovery matures and questions are emerging about the dollar’s recent strength.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)