The consistent rise in oil prices in recent months as well as evidence that energy demand growth is picking up in Asia have supported Saudi Arabia's economic outlook. The country has raised oil output to meet demand and progress continues on numerous strategic projects in infrastructure, energy and utilities. Political turmoil and uncertainty in Egypt, which threatens to spread into a number of Middle East countries, may lead to economic ripple effects across the region, although at this stage it appears unlikely developments will constrain the Kingdom's economic performance or adversely impact its banks.

Still, Saudi Arabia's economic recovery is moving at a slow but respectable pace. Total bank claims on the private sector fell slightly in December from November levels to SR775.76 billion, although this still indicates a 5.7 percent rise on the year, the best performance of 2010. The full-year result came in below our initial forecast for credit growth of 8 percent for 2010, although credit growth trends look healthy. Banks should begin to shrug off risk aversion and revive credit growth to 9.1 percent this year, with a return to double-digit growth in 2011, our forecasts show.

Private bank credit, excluding investments in securities, hit SR743.05 billion in December, up 4.8 percent year on year, the highest rate of growth since June 2009, according to central bank data. This is a good indication that a wider recovery in bank credit will unfold this year supported by project financing deals. Already, there is evidence of this in loan maturities data. The proportion of loans outstanding in December carrying long-term maturities of three years or longer rose to 24.8 percent from 23.9 percent the month earlier.

Meanwhile, the ratio of short-term loans (less than one year) to total loans fell to 58.8 percent in December, the lowest in at least two and a half years.

Public sector credit growth also accelerated in December to 14.8 percent year on year, reflecting the fact that state-linked entities are really driving the recovery process. Government sector GDP expanded 5.9 percent last year, the fastest growth of any sector.
 
Demand deposits

Deposit growth picked up pace in December to 4.7 percent, compared with 3.8 percent in November, again dominated by a focus on non-interest bearing demand deposits. Some 53.8 percent of total Saudi deposits are now in demand accounts, compared with 41.8 percent at the start of 2009. A low interest rate environment has cast interest-bearing time and savings deposits out of favor among investors. Funds held in these deposits fell 7.8 percent in December and they now account for 30.3 percent of total deposits, down almost 10 percent from the start of 2009.

SAMA's foreign assets have finished 2010 at SR1.65 billion ($440.4 billion) or equal to 101 percent of the country's GDP. SAMA's foreign assets have gained massively from the rise in oil prices in the second half of 2010. Between July and December, they advanced SR95.7 billion, compared with a decline of SR3.7 billion in the prior six months. The state's investments in foreign securities - which comprise long-term, low-risk investments such as bonds - rose 10.3 percent in December while deposits with banks abroad advanced 2.4 percent, the slowest pace of growth since March.

Net foreign assets of Saudi Arabia's commercial banks fell 9.8 percent in December from November levels to SR98.4 billion, and were down 11.5 percent on the year. That marks the first time in 2010 bank foreign assets fell; between January and November, they rose SR24.2 billion.
 
Money supply

Money supply data also looked optimistic. Growth in broad money supply (M3) accelerated to 5 percent in December compared with 3.7 percent in November. The gain in M2 - which includes demand deposits, currency outside banks and time & savings deposits - was even more pronounced at 9.3 percent, the highest rise of 2010. After decelerating for two months, the Kingdom's monetary base, comprising highly liquid currency in banks and held by the public, rose 2.5 percent in December to SR254.83 billion, data show. The money multiplier extended declines, slipping for the fifth month to 4.24 from 4.25 in November. Supporting the thesis that banks are awash with liquidity is the reverse repo facility which for the month of December jumped to SR88.9 billion from SR83.6 billion in the previous month. Point-of-sale transactions also reflected the general pick up in economic activity, rising 31.1 percent year on year to SR6.3 billion - an 8.5 percent advance from November.

The acceleration in money supply growth is still far from levels that we would constitute as having any meaningful implications on inflation. The rate of inflation fell to 5.4 percent in December, having declined gradually from an 18-month high of 6.1 percent in August. The primary triggers for inflation of an estimated 5.1 percent this year should be food prices and the continued squeeze on the country's housing market driving up rents due to inadequate supply.
 
- John Sfakianakis is chief economist at Banque Saudi Fransi, Riyadh.