RIYADH, 15 May 2006 — As the stock market correction continued in Saudi Arabia and in the region, latest Saudi Arabian Monetary Agency (SAMA) data show a huge increase in liquidity in March even though banks showed great restraint in their lending. Broad money supply (M3) increased by a whopping SR23 billion in March, the second largest monthly increase on record.
This follows a SR10.4 billion increase in February. Total bank deposits increased also by SR23 billion in March and by SR12 billion in February, for a total increase of SR35 billion in the two months that witnessed the stock market correction. A significant part of this increase probably reflects the proceeds of share sales deposited into bank accounts.
On a monthly percentage basis, deposits increased more in March than in February (4.6 percent vs. 2.4 percent), which was already more than double the rise of 1.1 percent recorded in January. On the other side of the ledger, total bank credit was almost unchanged in March, suggesting a slow down in the “red hot” bank lending of the past year. A breakdown of the lending shows that there was a small (SR3 billion) increase in long-term lending, but it was almost completely balanced by a same-sized decline in short-term credit in March.
The drop in bank lending in March comes after a SR9 billion increase in February. A natural question that arises is that if banks did not match the increased deposits with new lending, then where did that money go?
A little bit of sleuthing through the banking sector balance sheet suggests that SR15.5 billion may have ended up as banking sector reserves with SAMA. March data show that this item increased from SR4.5 billion in February to SR20 billion in March, the highest level in recent history. This raises a “chicken and egg” question: Which came first, the large increase in bank deposits or the increase in bank reserves? Some analysts have suggested the former, namely that bank deposits increased as investors liquidated their local share holdings and put the money into bank deposits. Instead of using this money to expand loans, the banks turned around and put the money into their accounts with SAMA (i.e. bank reserves). Checking the second possibility involves an analysis of SAMA’s balance sheet, but here the investigation is unclear. The banking sector’s reserves with SAMA should be recorded in its balance sheet as a liability item.
The published SAMA accounts do not list this item. There is an item called “Commercial banks and insurance companies deposits with SAMA” in the liabilities table, but this item does not show any change commensurate with the increase in bank reserves. Two major changes in SAMA’s liabilities in March, “Deposits of the central government and government agencies” (down SR29 billion) and “Other liabilities” (up by SR75 billion in March) may hold the story.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)