Private bank credit, excluding investments in securities, rose to SR748.2 billion in January, up 5.4 percent year on year, and the highest rate of growth since June 2009, according to data of the Saudi Arabian Monetary Agency (SAMA). Lending was up 0.7 percent from December, and over all claims on the private sector advanced 6.3 percent in January to SR781.6 billion, the data show. Bank credit in Saudi Arabia has struggled to recuperate following a downturn subsequent to the onset of the global financial crisis, which slashed loan growth rates to a fifth of what they were. The recovery continues at a moderate pace as banks vet loan requests rigorously, and private sector investment appetite remains moderate.

This is evidenced in the loan-to-deposit ratio, which fell slightly to 78.6 percent in January, compared with higher than 80 percent in all but one month in 2010. In 2008, at the height of an economic boom, the loan- to-deposit ratio had surpassed 90 percent for a number of months. This shows that while banks are liquid- deposits continue to grow, their foreign asset holdings are climbing- they are still exceptionally hesitant to agree to new loans. Public sector credit growth, meanwhile, fell in January by 4 percent.

Long-term project financing deals are likely to catalyze Saudi Arabia's credit recovery in the coming two years. The proportion of loans outstanding in January carrying long-term maturities of three years or longer (classified as "long term") climbed to 25 percent from 24.8 percent the month earlier, data show. Meanwhile, the ratio of short-term loans (less than one year) to total loans fell to 58.6 percent in January, the lowest in more than two and a half years.

A loan renewal will rely on the continued interest and engagement of domestic and foreign private sector companies in the kingdom's recovery program. The state has shouldered economic growth in the last two years; government sector GDP expanded more than 11 percent. It is still unclear how regional political turmoil in a number of Middle East countries will affect the investment decisions of private sector businesses in Saudi Arabia. The Saudi stock exchange has fallen almost 12 percent since Jan. 25, when Egypt's popular revolution kicked off. Numerous Saudi businesses invested in Egypt could suffer as a result of lower economic growth there, as well as equity market volatility. As of yet we are not revising our macro-economic forecasts, although downside risks will mount should confidence, investments and consumption decline.
 
SAMA’s foreign assets

The Saudi central bank's foreign assets stash also received a substantial boost of SR16.77 billion ($4.47 billion) in January due to elevated oil prices, which averaged $89.58 a barrel for the month. SAMA foreign assets stood at SR1.668 trillion ($444.8 billion), 8.7 percent more than a year earlier and the largest holding for SAMA on record. The holdings in January surpassed SAMA's previous record in November 2008, after which the country was forced to draw down its reserves to finance its budget during an oil price slump.

The state's investments in foreign securities - which comprise long-term, low-risk investments such as bonds - rose 10.9 percent in January while deposits with banks abroad slipped 0.4 percent, the slowest pace of growth since February 2010.

A word of caution on foreign assets: while oil prices promise to remain elevated due to regional turbulence, the government has also embarked on a SR135 billion citizen support package that aims to support nationals, including plans to provide jobless Saudis with an unemployment benefit for the first time. The finance minister has said this extra spending to cover this plan would come from state reserves. It is likely SAMA will draw down deposits with banks abroad in the coming months, which may reduce the central bank's overall foreign asset holdings or at least slow down growth.

Banque Saudi Fransi estimates about SR98 billion could be drawn down to support the program, which pledged to expand public sector employment and made permanent a 15 percent cost of living increase introduced in the last three years. The bank’s preliminary calculations show an additional cost of just SR45 million for the wage bill; costs related to the 130,000 permanent public sector employees were already accounted for in the budget. Longer-term, pensions will exert greater pressure on the government in the coming decades. Expanding the public work force is a short-term solution that will fast long-term challenges.

However, Saudi Arabia has raised oil output to as much as 9 million barrels per day, compared with about 8.5 million bpd in January, in a bid to quell price pressures resulting from a decline in output from Libya, the third North African state facing a significant popular revolt following successful revolutions in Tunisia and Egypt. As regional political turmoil continues to unfold, we are reviewing our oil market forecasts, which initially foresaw Saudi crude oil production of 8.48 mbpd in 2011 and an average WTI oil price of $82.50 a barrel. The extra production and higher prices - $89.8/barrel average price for US oil and $103.7/barrel for Brent crude in February - will nonetheless offset a good deal of the burden of any additional budgetary spending this year by the government.
 
Money supply, deposits

Both money supply and deposit growth painted an optimistic picture in January. Growth in M3 of 8.1 percent in January compared with 5 percent in December and below 3 percent in each of October and November. M2 - which includes demand deposits, currency outside banks and time & savings deposits - topped 10 percent for the first time since October 2009.

The Kingdom's monetary base, comprising highly liquid currency in banks and held by the public, rose fell 5.6 percent year on year and 7.5 percent month on month in January to SR235.73 billion, data show. This likely indicates that additional capital is being deployed in the economy rather than held in bank coffers. The money multiplier, rose for the first time after dropping for five months straight. The multiplier climbed to 4.61 from 4.24 in December.

A 7.7 percent gain in deposits to SR987.92 billion was due to continued preference for demand deposits as well as a small spike in foreign currency deposits, data show. Non-interest bearing demand deposits comprise almost 55 percent of total Saudi deposits - up almost 13 basis points in the past two years. This shift has been supported by a low interest rate environment reducing the appeal of interest- bearing time and savings deposits. Funds held in this category of deposits fell 6.1 percent in January, while foreign currency deposits were down 6.9 percent year on year in January, although they gained 6.3 percent from the month earlier.

These ratios are likely to hold this year as the central bank appears poised to hold interest rates at current levels in a bid to encourage greater bank lending. We anticipate a change in the benchmark rate only next year.

Point-of-sale transactions also reflected the general pick up in economic activity, rising 28.2 percent year on year to SR6.51 billion - a 2.9 percent advance from December. The value of commercial and personal checks also rose 14.6 percent in January to SR47.7 billion. Since Saudi Arabia is still an overwhelmingly cash-based society, these data are not completely reliable in offering a picture on the economic condition. However, they do point to the consistent upturn in private consumption, which is supported by anecdotal evidence. Saudi inflation fell to 5.3 percent in January, having declined gradually from an 18-month high of 6.1 percent in August. As global food prices continuously climb, the government is likely to keep a close eye on food and housing prices this year.

On the trade front, letters of credit were little changed in January - new LCs issued against imports were up just 1.5 percent year on year in January. The level of LCs issued tends to vary widely depending on the month of the year. We expect import flows to improve in 2011 after rising less than 1 percent last year.

The general economic pick up will, however, continue to depend on the attitude of banks. Another signal of banks' continued hesitation is their holdings in foreign assets, which jumped almost 23 percent in the year to January, including a 6 percent rise from December. Still, banks drew down funds held in the central bank's repo window by 32.5 percent, the seventh straight month of declines. We expect banks will strive to step up lending this year to help improve profits following a few years of weak performance.
 
— John Sfakianakis is chief economist at Banque Saudi Fransi, Riyadh.