JEDDAH: The Saudi Arabian Monetary Agency’s (SAMA’s) net foreign assets recorded the first monthly decline in December 2008 since August 2007. SAMA’s net foreign assets declined to SR1.64 trillion ($438 billion) at the end of December, from SR1.66 trillion in November. Despite the slight fall, Saudi Arabia’s foreign asset position remains formidable. At end of 2008, the net foreign assets of SAMA and Saudi commercial banks amounted to SR1.68 trillion ($448 billion), equivalent to 96 percent of GDP (gross domestic product) or 250 percent of imports of goods and services.

Samba Financial Group said yesterday in its Economic Monitor for February that 2009 would be a year of weak economic activity, with private output stagnating at best.

The nonoil sector is expected to maintain modest growth due to the ramping up of public sector investment. “Looking at the overall economy, the main drag on GDP growth will be lower oil production. We now expect a 14 percent reduction in Saudi oil output as the authorities attempt to support global prices. Although we expect the nonoil sector to expand by around 2 percent, this will be more than offset by the contraction in oil output and the economy is expected to shrink by 1.8 percent in 2009,” Howard Handy, general manager and chief economist at Samba, said.

By 2010 global financial deleveraging should have eased significantly and with US consumers beginning to regain some confidence, oil prices should post a 9 percent gain. Saudi Arabia’s nominal GDP should climb by around 11 percent to around SR1.39 trillion ($370 billion). Real growth is also expected to post a respectable 4.2 percent increase.

There has been a significant increase in net foreign assets over the years. SAMA’s net foreign assets surged from SR157 billion in 2002 to SR563.56 billion in 2005 and SR1.64 trillion in 2008.

Saudi Arabia’s official reserves, however, showed decline in 2008. After rising to SR33.76 billion in 2007 from SR20.61 billion in 2002, the official reserves fell to SR30.34 billion in 2008, according to SAMA statistics.

Saudi Arabia’s money supply increased to SR929.13 billion in 2008 from SR390.43 billion in 2002.

The SAMA monitor said liquidity in the Saudi banking sector was improving. Deposit growth has firmed, and with loan growth weakening dramatically the average loan-deposit ratio has fallen sharply.

Risk sensitivity remains pronounced across the sector and surplus funds have typically been placed on deposit with SAMA or used to purchase additional treasury bills.

Banks have also used their surplus funds to replenish holdings of foreign assets, which had been seriously depleted by the withdrawal from Saudi Arabia of speculative foreign capital in the first half of 2008. This replenishment has been further encouraged by SAMA’s October abolition of limits on swap arrangements, which has prompted Saudi banks to exchange increasing amounts of riyals for US dollars, and to use these to purchase US securities.

Although lending to the private sector increased by a record 27 percent in 2008, this disguises a weak second half performance. Lending to the private sector grew by a monthly average of 3 percent in the first half of the year; the second half saw the rate decline to 1 percent. December witnessed a 1.1 percent contraction as banks focused on reinforcing their balance sheets and tightened risk criteria, the Samba report said.

Private sector imports paint an equally sobering picture. The value of new letters of credit opened in December decreased by 23 percent compared with November, and was down by almost 40 percent compared to a year earlier.

Notable declines were recorded in both cars and building materials, which fell by 26 percent and 22 percent respectively in the 12 months to December.

Saudi projects were also affected recently. Saudi projects on hold or canceled had climbed to around SR146.25 billion ($39 billion) by mid-February, with the total number of projects on hold in the first quarter of this year already slightly ahead of the total for the fourth quarter of last year. Private construction and cement projects are also feeling the pinch. Public projects that the government sees as priorities — especially energy, health, education and transport projects — should continue to move ahead,” Handy said.