JEDDAH, 29 November —The broadest monetary aggregate (M3), which comprises total deposits and currency outside the banking system or in circulation, rose moderately by 1.8 percent to SR320.3 billion in the first nine months of this year, but the growth was relatively faster at 4.8 percent over the same period of last year. In absolute terms, total deposits of the Saudi banks expanded by 3.9 percent or (SR10.2 billion) while the currency in circulation contracted by 8.8 percent or (SR4.5 billion), suggesting a net expansion in M3 of SR5.7 billion during the first nine months of this year. However, on a sequential basis, M3 dropped by 1.1 percent in the 3-month to September 2001, from SR324.0 billion in June 2001, where most of the decline was attributed to the 5.6 percent contraction in the amount of currency in circulation. The overall trend of monetary developments in the first nine months of 2001 reflects the relative slowing down of the Saudi economy on the back of weakening global economic conditions.
While the recent sharp fall in oil prices could provide an opportunity for speculators to spread rumors about the vulnerability of the Saudi riyal, the inherent strength of the currency will likely remain intact. According to the 3rd quarter statistical bulletin of SAMA, the combined net-foreign assets of Saudi Arabia have reached SR354.3 billion at the end of September 2001. This figure is nearly 11 percent above the total amount of M3 in the same period, thus reassures stability of the Saudi currency and vouchers for its full convertibility. The net-foreign assets of Saudi Arabia comprised of assets worth SR185.5 billion belonging to the Saudi Arabian Monetary Agency, SR42.6 billion to domestic commercial banks and SR126.1 billion to independent government entities.
In terms of nominal GDP, M3 ratio shrank from 56.3 percent in 1999 to 48.5 percent in 2000, indicating a decelerating pattern. In view of the ongoing worldwide recession and the recent drop in oil prices to a two-year low, M3 is expected to reach a level of around SR322 billion at the end of this year, suggesting a sequential increase of 0.5 percent in the fourth quarter of this year. Assuming that the ratio of M3 to GDP will average at around 48 percent for the whole of 2001, nominal GDP is forecast to reach SR669 billion, representing an increase of around 3 percent over the last year’s figure.
The net domestic liquidity position measured by the difference between total deposits and total domestic claims, has worsen with the gap widening by an additional SR9 billion during the first nine months of this year. At the end of September, total deposits with the Saudi banking system stood at SR273.8 billion in relation to the outstanding domestic claims of SR316.2 billion, suggesting a net domestic liquidity shortfall of SR42.4 billion. Banks’ claims on the Saudi private sector accounted for nearly 57.8 percent (SR182.74 billion) while those on the public sector represented the remaining 42.2 percent (SR133.46 billion). The composition by claims included investment in government bonds at 38.6 percent of the total, loans to private sector (53.5 percent), credit to public sector (3.5 percent), investment in private sector equities (2.6 percent), discounted private sector bills (1.6 percent) and treasury bills (0.1 percent).
The narrowest money supply aggregate (M1), which comprises of currency in circulation and demand deposits or non-interest bearing deposits (NIBs) rose by 4.6 percent to SR173.1 billion in the first nine months of this year, but by a whooping rate of 9 percent in the 12-months to September 2001. On a sequential basis, M1 shrank by 2.7 percent in the third quarter, with most of the fall seen in the currency in circulation. The demand deposits, which accounted for nearly 73.1 percent of total M1, rose strongly by 10.5 percent to SR126.5 billion in the first nine months of this year, and was even more rapid, rising by 12.3 percent in the 12-month to September 2001. Businesses and individuals provided nearly 97 percent of the total demand deposits held by the local commercial banks at the end of September 2001, compared with 96.3 percent over the same period of last year.
Currency in circulation has been trending lower in the last few years due to the increased use of ATMs, points of sale (POS) and credit cards. The currency outside banking system ratio to M1 declined from 34.6 percent in 1995 to 30.8 percent at the end of December 2000 and further down to 26.9 percent at the end of September 2001. After shrinking by 7.3 percent in the year 2000, currency in circulation dropped further by 8.8 percent in the first nine months of this year, however, but marginally changed upward from the level prevailing at the end of September 2000.
The broader money supply aggregate (M2), which is the sum of M1 and time and saving deposits, rose moderately by 1.8 percent to around SR261 billion in the first three-quarter of this year, but it increased by 5.9 percent in the 12-month to September 2001.
Time and saving deposits, which accounted for nearly 33.7 percent of the total M2, shrank by 3.2 percent during the first nine months of this year, suggesting that the 400 basis points drop in interest rates in the same period was the principal reason. By the end of September 2001, the average 3-month Saudi riyal deposit rate has come down to 3.123 percent, from the 6.673 percent prevailing rate at the end of December 2000. The spread between riyal and dollar interest rates has narrowed down from 30 basis points at the end of December 2000 to 20.5 basis points at the end of September 2001. Time and saving deposits belonging to businesses and individuals, which accounted for nearly 56 percent of the total in September, declined sharply by 8.5 percent to SR49.2 billion in the first nine months of this year, however, they remained stagnant around the level reached at the end of June 2001. On the other hand, time and saving deposits of official sources rose by 4.5 percent to SR38.7 billion in the first three-quarter of this year, but grew moderately by 2.1 percent over the second quarter.
(The author is chief economist at the National Commercial Bank in Jeddah.)
