JEDDAH, 26 March 2005 — Deposits in the Kingdom’s banking sector increased by an impressive 18.5 percent to SR422 billion last year, while combined assets of commercial banks surged by 20.2 percent to SR655 billion during the same period, according to a Market Review & Outlook report by the National Commercial Bank (NCB).

The report, however, said that outstanding domestic claims rose by 21 percent to SR490 billion by end-2004, accordingly net domestic liquidity position, measured by the difference between total deposits and total domestic claims, worsened with the gap widening by SR18.7 billion. As a result, the net domestic claims shortage increased by 38.4 percent to SR67 billion by the end of 2004. However, the surge in domestic claims was driven by a 37.4 percent rise in outstanding claims on the private sector, which stood at SR314 billion and those on the public sector edged lower by 0.4 percent to SR176 billion by end-2004.

NCB Chief Economist Dr. Said Al-Shaikh said: “Growth of monetary aggregates accelerated markedly last year, reflecting a healthy macroeconomic environment in the Kingdom. This was mostly due to higher than expected oil prices and increased production, with Brent crude averaging at $38.5 per barrel for 2004. Consequently, government finances improved dramatically, with the national budget generating an actual fiscal surplus of SR98 billion last year from the originally budgeted deficit of SR30 billion.”

The NCB report said that strong growth in bank deposits drove monetary expansion as demand for banks’ credit increased in order to finance domestic activities, which was supported by the low interest rate environment.

The narrow money supply (M1) surged by 18.1 percent to SR263 billion last year on the back of a 21.3 percent rise in demand deposits, which reached SR203 billion by end-2004. While historically, demand deposits or non-interest bearing accounts (NIB’s) have accounted for around 41 percent of total deposits, their share has been increasing over the past four years to reach 48 percent of total deposits in 2004.

At the same time, currency outside banks also contributed to the growth of the narrowest monetary aggregate, rising by 8.5 percent to SR60 billion in 2004. However, their share has continued to decline, reaching 22.8 percent of M1 last year compared to 35 percent in 1999. This downward trend reflects Saudi consumers’ increased reliance on electronic means of payments instead of cash. This is exhibited by the 21.3 percent increase in the number of “point of sale” transactions that totaled SR24 billion by end-2004. In addition, the number of ATM transactions rose by an impressive 28.2 percent to 412 million transactions last year compared to its level in 2003.

The broader money supply aggregate (M2), which is made up of M1 in addition to time and saving deposits, expanded by18.9 percent to SR400 billion in the 12-month period ending December 2004, influenced by the 21.3 percent rise in M1. Time and saving deposits, which account for 32.4 percent of total deposits, grew by a whooping 20.5 percent to SR136 billion last year as interest rates bottomed out and started their upward cycle. Both private sector as well as government sector deposits rose by 26 percent and 12 percent to SR84 billion and SR52 billion, respectively.

The report added the broadest money supply aggregate (M3), which includes M2 in addition to quasi-monetary deposits, grew by 17.2 percent to SR482 billion last year. This growth was largely due to the sharp increase of 21.3 percent in NIB’s, in addition to the 20.5 percent rise in time and saving deposits. Quasi-monetary deposits, which include residents’ foreign currency deposits with local banks, deposits held for LC’s and LG’s, as well as residents’ outstanding remittances, advanced by 9.2 percent to SR82 billion by end-2004.

Foreign currency deposits edged up marginally by 1.6 percent to SR65 billion, while deposits for LC’s jumped by a massive 124 percent to SR6.4 billion and those for LG’s increased by 28.2 percent to SR3.3 billion, reflecting a surge in trade-related activities. Furthermore, remittances pending for onward transfer also rose by 28.1 percent to SR7.4 billion by the end of last year.

The average three-month deposit rate on the Saudi riyal edged up by 10 basis points last year to 1.73 percent from 1.63 percent in 2003. The three-month US dollar deposit rate averaged at 1.53 percent in 2004 compared to 1.11 percent the year before. As a result, the differential between the Saudi riyal and US dollar interest rates narrowed to 20 basis points last year compared to 52 basis points in 2003.

However, by December 2004, interest rate on the Saudi riyal increased to 2.46 percent, while that on US dollar deposits rose to 2.43 percent, thereby tightening the differential between the two further to three basis points only. Such narrow differential reflects the healthy state of the Saudi economy and the ample liquidity position of Saudi Arabian Monetary Agency (SAMA), the NCB report said.