JEDDAH: According to the latest monetary data, domestic credit growth in Saudi Arabia slowed down in the 12 months to June, expanding by just 4 percent, down from more than 35 percent a year earlier. Commercial bank claims on the public sector showed the biggest slowdown, moving into negative territory from near 60 percent growth in October as the government cut yields on its treasury bills, making them less attractive to commercial banks, according to the Riyadh-Based Samba Financial Group’s Economic Monitor for August.
However, most of the downward pull came from private sector credit, which accounts for around 75 percent of overall domestic credit. Private credit growth fell from around 35 percent in June 2008 at the height of the boom to just 5.6 percent 12 months later.
The retrenchment is clearly visible on the other side of the monetary balance sheet. At first glance, broad money (M3) growth of 16.4 percent in the year to end-June points to reasonably firm domestic demand, given that the growth rate in the previous 12 months, which encompassed boom conditions, was 21 percent. However, a closer look at the data shows that much of the impetus for money supply growth came from quasi money, or savings accounts. “In the face of growing economic uncertainty and a lackluster stock market performance, consumers have felt compelled to build up their bank deposits during the past year, even with the heavily negative deposit rates on offer,” Howard Handy, chief economist at Samba, said.
Simultaneously, the growth in holdings of narrow money (notes, coins and current accounts) subsided rapidly as private consumption cooled. This contrasts sharply with the 2007-08 boom period when M1 growth was the main driver of overall money supply and quasi money growth fell away. Mindful of the weakening private economy, the authorities have taken a number of steps to increase the flow of private sector credit. Over the past twelve months Saudi Arabian Monetary Agency (SAMA) has slashed commercial bank reserve requirements, trimmed yields on treasury bills, and reduced the interest that it pays on commercial bank deposits. The latest such move saw SAMA halve its reverse repo rate (the rate it pays banks for deposits) to 0.25 percent on June 16. Data for June indicate that SAMA’s promptings have had some effect. Commercial bank deposits with the central bank declined by 21 percent compared to May, while bank credit to the private sector registered its first month-on-month gain since February, increasing by 0.5 percent.
However, the Samba report said, in absolute terms the increase in commercial bank lending was only around SR4 billion, while the reduction in deposits was some SR20 billion. The Saudi banking system is liquid, but risk sensitivity is high. This illustrates two main points. First, the resilience of deposit growth, the weakness of private sector credit growth, and the authorities’ various easing measures, have provided the banking system with tremendous liquidity. The average loan-deposit ratio is now only 83 percent, down from a peak of almost 95 percent as recently as September.
Liquidity is such that nominal overnight interbank rates have recently dipped into negative territory on a number of occasions, trading as low as -0.30 percent.
The second point is that risk sensitivity remains elevated across the banking system.
The Samba report also said weakness in domestic credit is reflected in sharply reduced private consumption activity. Data for June show that the value of points of sale transactions actually contracted by 12 percent compared to a year earlier. The near term consumption outlook remains unfavorable given the prospects for the local stock market, which retains an important influence on spending.
The public sector investment surge shows little sign of abating; just under $27 billion worth of contracts were awarded by the public sector in July alone according to MeedProjects. Since October, $140 billion worth of public contracts have been awarded, around 70 percent of which has been in the non oil sector.
The pace of public investment is now outstripping the rate of private sector projects being placed on hold or canceled. The value of projects put on hold totaled $6.7 billion in July, against $17 billion in June.
The pace of public sector contract awards will also likely ease in the coming months before reviving in the final quarter. “We continue to expect that the pace of public sector investment will outweigh the slowdown in private activity, allowing the non oil sector to show real growth of around 2.3 percent this year,” Handy said.