Money supply recorded a trivial fall, which is not surprising given the strong growth that was recorded during the previous two months with the help of government handouts and payments of private sector bonuses. Those payments have also translated into higher consumption, particularly on consumer durables. Consistent with the trend in the money supply, personal consumption declined slightly in the month of May although it remained above the seasonal norm. Banque Saudi Fransi would not be surprised if the pace of growth in both the money supply and personal consumption were to abate slightly in the next two months due to seasonal factors, specifically the annual summer leave period for both expatriates and nationals.

Private bank credit excluding investments in securities expanded 7.1 percent in May, up from 6.9 percent a month earlier and the fastest rate of growth since May 2009. The pace of MoM expansion in private credit also accelerated. Credit to public sector enterprises fell a moderate 0.35 percent in the month to May 30 following a larger 5.8 percent drop in the month of April. In absolute terms, the expansion in private sector credit easily outweighed the decline in credit to public sector enterprises, reflecting the relatively small size of public sector lending.

Bank credit to the private sector totaled SR767.9 billion in May, whereas credit to the public sector totaled a mere SR27.6 billion. Consequently, public sector enterprises have never “crowded-out” lending to the private sector. Instead, the challenge lies in the role of the state in financing large projects and reducing the need for bank credit. Private sector business expansion is proceeding, albeit less briskly than growth in lending to the public sector. While banks are less risk averse than they have been over recent years, they remain vigilant in their lending practices.

Saudi Arabia’s foreign assets grew to a record high of SR1.80 trillion in the months of April and May as a result of robust oil revenues and possibly a higher return on SAMA’s (Saudi Arabian Monetary Agency) investments. Oil prices (WTI) averaged $101.3 a barrel in May compared to $110.3 a barrel in April. SAMA’s deposits with foreign banks grew 23.9 percent in May, investments in foreign securities grew 12 percent and foreign currency assets (excluding gold reserves) rose 25.5 percent. This year alone (January-May), foreign assets have increased by SR134 billion. The government has stated that it doesn’t want to tap into foreign assets to support the new spending initiatives announced by Custodian of the Two Holy Mosques King Abdullah in February and March, and these figures are consistent with this statement. Foreign asset growth, in the context of a growing economy, is healthy from a macroeconomic standpoint. The pace of foreign asset growth is likely to slow in the coming months as oil prices stabilize at lower levels and the bill to finance Saudi Arabia’s SR485 billion spending program accumulates.

Money supply in its broadest form declined from SR1.18 trillion in April to SR1.17 trillion in May, although this nevertheless represents a healthy 16 percent annual growth rate. Money supply has been growing for six months and given the robust pace of economic growth, it is reasonable to expect that the recent correction will be temporary. A modest slowdown during a strong upward trend is not unusual.

Despite the pace of growth in the money supply, price pressures remain benign and there is very little noted transmission into broader price pressures. In the month of May, inflation was 4.6 percent, down from 4.8 percent the previous month and the lowest inflation rate seen in 16 months. The inflationary impact of the recently announced boost to government spending and the public and private sector bonuses have so far been muted. Headline inflation fell in the month of May due to a decline in food price inflation (from 6 percent in April to 5.7 percent in May), and several base effects that surprisingly pushed prices beyond the expected threshold. Furniture, medical care, transport and education experienced very modest price increases. The other expenses and services categories experienced the fastest growth in the month of May, although this is hardly surprising given recent sharp rises in the gold price and jewelry prices. Rental inflation rose by nearly 0.6 percent MoM but fell YoY from 7.5 percent in April to 7 percent in May.

The government, as per King Abdullah’s decrees in March, has recently taken steps to invite those Saudis who qualify to register for a SR500,000 loan from the Saudi Real Estate Development Fund (REDF) without the requirement of owning a piece of land. On the first day of accepting applications, one million Saudis registered, most of them electronically, according to press reports last week. The state’s cash injection into REDF will enable a greater number of Saudis to buy homes. Nevertheless, the serious issue of price affordability will endure without broad reforms. The official home ownership ratio of 62 percent could come under pressure unless more youth gain access to mortgage financing in the next decade. The median prices of villas and land are out of reach of most public and private sector employees; however mortgage terms should become more favorable and help to bridge the gap.

The government is working on several fronts to try to alleviate supply constraints, dedicating SR55 billion ($14.7 billion) to programs that help lower income citizens to obtain funding for home purchases. The king allocated a considerable SR250 billion to the General Housing Authority to finance the immediate construction of 500,000 new units.

Other lending indicators such as the monetary base have also shown signs of respite after a period of strong growth in the months of March and April. A rise in the monetary base is a sign that money is potentially available to banks for lending. The bank thinks that the near 10 percent decline in the monetary base in the month of May is a short-term phenomenon that reflects a correction following the unusually high liquidity that followed the payout of government bonuses. Moreover, bank credit to the private sector remained buoyant in May despite the reduction in the monetary base. The economy is expanding and that is a fundamental driver of growth in the money supply.

The amount of commercial banks’ deposits (reverse repo) held at SAMA fell noticeably from SR95.7 billion in April to SR65.5 billion in May. Banks have deployed this money into the economy in the form of credit to the private sector as well as credit to government and quasi-government entities. This could be a further indication that banks are becoming less risk averse compared to the last two years. It also reflects the fact that deploying capital into the economy is a more profitable use of funds than placing it at a near cost with SAMA.

Most businesses and individuals have chosen to keep their funds in non-interest-bearing demand deposits, reflecting their easy accessibility and the poor appeal of savings deposits in the current low interest rate environment. Demand deposits grew 30.7 percent YoY in May compared to 33 percent YoY growth in April. In May, demand deposits accounted for 57.3 percent of total deposits, up from just 48 percent at the start of 2010. The small decline in demand deposits in the month of May reflected a shift of funds out of non-interest accruing deposits by businesses. In contrast, time and savings deposits increased 34.8 percent YoY in May, including a MoM increase of 1.7 percent. Foreign currency deposits eased 1 percent MoM as depositors began the seasonal shoring-up of assets that typically occurs during the summer months.

The value of POS transactions fell 2.6 percent MoM from SR9.1 billion to SR8.8 billion following an 18 percent increase in the month to April. Following two months of strong consumption growth, a small decline is not unusual. The May result nevertheless represents a massive 41.7 percent surge compared with year earlier levels, indicating that consumers were willing to make big-ticket purchases. The number of POS transactions also recorded strong growth in May of 27.1 percent YoY. Saudi Arabia is still a largely cash-based society. While POS transactions are a broad indicator of consumption trends, they would not include the total impact on consumer purchasing patterns of recent government bonuses.