RIYADH, 4 April 2005 — What economists call liquid wealth, bankers call it liquidity. Liquid wealth is the value of all liquid assets like bank accounts, mutual funds, equity shares, etc. held by individuals or businesses. The key here is “liquidity”, meaning that the asset can be sold or bought easily. Liquid wealth is a key driver of consumption and investment, and thus, economic activity or income (measured by gross domestic product (GDP). The process is a two-way street. Liquidity affects GDP and vice versa. The portion of income that individuals and businesses save is an addition to liquid wealth, which is then available for the economy to invest or spend. Spending generates current economic activity while investment creates the capacity for more economic activity. There are various layers of liquid wealth, depending on how easy they are to liquidify. The first layer, of course, is cash and bank deposits, i.e., money supply. In the Kingdom, the broadest measure of money supply is M3, which includes cash held by the public, demand deposits, time and savings deposits, and quasi-monetary deposits. As of February 2005, the latest Saudi Arabian Monetary Agency (SAMA) data show that M3 stood at SR489 billion.
The next layers of liquid wealth are: (1) domestic shares held directly and indirectly (through mutual funds) by the public, and (2) foreign bank deposits, equities and other financial assets held by domestic residents.
Item 1 can be measured by the market capitalization of all domestic shares. Latest Tadawul data show total market capitalization (as of March 26) was SR1,474 billion, by far the largest component of the Kingdom’s liquid wealth. Item 2 is harder to measure because of incomplete data. We do not have data on foreign equities or financial securities held by Saudis. BIS statistics show that as of September 2004, deposits held by Saudi non-bank sector in BIS banks totaled SR97 billion. In addition, SAMA data show that, as of February 2005, gross foreign assets of Saudi banks totaled SR92 billion. SAMA itself also has foreign assets totaling SR350 billion, but we exclude it from our analysis here.
Another key component is liquid wealth held in the domestic real estate sector, for which we also have no data. Thus, adding up the known components, total liquid wealth of the Saudi economy (excluding SAMA) is around SR2.15 trillion. The sheer size of this figure highlights the magnitude of the impact that liquidity can have on domestic economic activity. Think of this liquidity as money sloshing about in the following buckets of domestic economic activity: consumption, imports, savings, direct investment, equity and mutual funds and real estate. The figure also highlights the over-sized impact of domestic equity market volatility. Market capitalization of the Saudi stock market was SR280 billion in 2002 and SR590 billion in 2003! The large but volatile growth in equity-based liquidity is bound to have a large and volatile impact on the economic buckets.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)