The latest data of the Saudi Arabian Monetary Agency (SAMA) also show that, as a consequence of higher oil prices, the Kingdom’s foreign assets advanced almost 11 percent to a record level. Bank credit growth to the private sector further extended its moderate climb to 6.5 percent, a 22-month high.

In the first quarter, Custodian of the Two Holy Mosques King Abdullah announced a block of initiatives to support Saudi citizens estimated to cost SR485 billion over several years, including plans to raise wages, pay out one-off bonuses, introduce an unemployment benefit, build new homes and create jobs. The immediate distribution of bonuses in the first quarter added about SR53 billion to fiscal expenditures this year, according to our estimates. Many private sector companies and banks followed suit with similar bonuses, greatly enhancing the purchasing power of citizens and residents.

The implications for money supply and deposit growth were apparent. Broad money supply (M3) increased 13.8 percent year on year to SR1.15 trillion in March, while growth in M2 — which includes demand deposits, currency outside banks and time and savings deposits — rose to 14.9 percent, the highest since June 2009.

Saudi Arabia’s monetary base, comprising highly liquid currency in banks and held by the public, soared 24.7 percent in March to SR276.1 billion and, as a result of the liquidity boost, the money multiplier fell to 4.16 from 4.52 the month earlier.

The surge in privately held funds was reflected in total bank deposits, which grew 13.3 percent to SR1.04 trillion in March compared with the year earlier, the fastest rate of growth since September 2009. Non-interest-bearing demand deposits advanced by an annual 28.2 percent to SR579.5 billion during the month, up 7.1 percent from February.

Customers have favored demand deposits for the last two years due to their accessibility and the low interest rates offered on savings deposits. Demand deposits now account for 55.5 percent of total deposits, compared with less than 42 percent at the start of 2009. Time-and-savings deposits, by contrast, slipped 5.1 percent year on year in March, although they are up almost 1.8 percent from February, while foreign currency deposits grew by an annual 6.4 percent.

One short-term consequence of government payouts and salary hikes this year should be a rise in inflation as private consumption picks up pace, with consumers more likely to pursue big-ticket purchases such as cars or appliances. Headline inflation fell in February to a 10-month low of 4.9 percent, but we anticipate prices will gain impetus in the coming months due to money supply growth, higher global food prices, steep rents and the weaker US dollar. Inflation should average 5.6 percent for the year, up from 5.1 percent last year.

Private consumption, meanwhile, is already on the rise. In March, there was a notable gain in the number and value of point of sale (POS) transactions, which grew 22.6 percent month on month to SR7.7 billion. The number of transactions rose 18.7 percent to 15.1 million compared with the month earlier. Saudi Arabia is a largely cash-based society, yet these data send a clear signal that residents are spending more money after receiving bonuses equivalent to a 17 percent one-time pay rise. The value of commercial and personal checks, too, jumped almost 29 percent on the month to SR51.6 billion, illustrating the immediate impact of the government cash injection.

Loan growth

Momentum behind private consumption aside, bank lending to the private sector continued to exhibit modest rates of growth. Private bank credit, excluding investments in securities, rose 6.5 percent in March to SR763.93 billion, the fastest growth rate since May 2009 but still well below double-digit levels witnessed prior to the financial crisis. Over all claims on the private sector were up 7 percent, while claims on the public sector climbed 3 percent. Bank credit to public sector enterprises rose 5.8 percent month on month.

The moderate pace of loan growth compared with deposits took the loan-to-deposit ratio down to 76 percent. Banks have plenty of cash to extend new loans, but the appetite of private sector businesses remains guarded. The government has maintained its position as the primary financier of strategic projects due to the combined effect of risk aversion among banks and hesitant private sector firms. As such, we anticipate government sector GDP will expand 5.6 percent this year, its third straight year of growing more than 5 percent, while private sector GDP growth should stand at a slower 4.2 percent.

Long-term loans yet again took precedence as banks are more likely to get involved in project financing to ventures where the state is a key participant. Loans maturing in three years or longer, classified as long term, jumped 15.2 percent in March, compared with 10.7 percent growth in medium-term loans (one to three years) and 1.5 percent for short-term lending.

State outlays

The government’s massive spending boost this year, which should yield overspending of 45 percent on targets set out in the budget, has been supported by a high oil price environment. US oil prices averaged around $103.4 a barrel in March - 16 percent higher than they were in December. Brent crude prices also jumped to $114.4 in March.

Net foreign assets of SAMA grew in tandem by 3.8 percent in the month to March to SR1.73 trillion ($460.98 billion), a record level. This marks a 10.9 percent rise from the year earlier as the central bank invested in both long-term, low risk foreign securities and deposited funds abroad.

Flush with liquidity, banks also boosted their foreign assets by 10.4 percent month on month to SR127.1 billion, while the money they deposited in the central bank’s reverse repo window soared by almost a third to SR95.1 billion, the highest in more than a year. For the first time in almost two years, cumulative bank profits rose in March, according to SAMA data. Profit growth of the country’s commercial banks was up 9.6 percent year on year. An improved lending environment and lower provisioning contributed to this shift in fortune.

While citizens are likely to consume more this year, there is little evidence companies are planning to substantially increase imports to meet new demand.
 
— John Sfakianakis is chief economist at Banque Saudi Fransi, Riyadh.