RIYADH, 17 January 2005 — Markets started 2005 by confounding everyone. Instead of a January positive surprise, analysts have been taken aback by a negative surprise in the first two weeks of January. Typically, November and December are months of tax-selling when investors liquidate loss-making investments and write off their losses from tax liabilities, and year-end profit-taking. This way, they start the New Year with a fresh plate and buy back shares — sometimes even the same ones they sold thereby establishing new cost base benchmarks — thereby providing a nice upward fillip to the market.
The surprise started with the US dollar gaining strength in the New Year, when everyone had been focused on its medium-term underlying weakness. In the space of two weeks, the dollar rose 3.5 percent against the euro, from $1.356 to $1.310 per euro. Against the British pound and the Swiss franc, the dollar rose 2.5 percent and 3.7 percent, respectively, while its level against the Japanese yen fell, primarily because of Bank of Japan intervention. This happened despite a rise in oil prices of over 12 percent from $40.38 to $45.26 in the same two weeks. Note that normally, higher oil price is a negative factor for the dollar because it tends to increase the US import bill and deteriorate the country’s trade deficit.
The dollar’s unusual moves spooked global equity markets, which went on reverse gear ever since. Analysts still expect the dollar to resume its medium-term fall, describing its current strengthening as unwarranted.
Domestically, the Saudi Arabian Monetary Agency’s (SAMA’s) latest data for the month of November show a massive increase in liquidity. Broad money supply (M3) increased by a whopping SR38.6 billion in November to reach a new record of SR490 billion. The monthly increase of November is bigger than the annual increase in many previous years, leading us to suspect that unusual one-off events maybe responsible. The increase came from both demand deposits and time and savings deposits (SR18.8 billion and SR19 billion respectively).
On the other side of the balance sheet, total bank lending to private and public sectors fell SR18.6 billion. Part of the drop in lending was associated with October’s increased lending related to the Ettihad Etisalat’s IPO.
From the point of view of banking sector’s consolidated balance sheet, both the large increase in deposits (a liability item) and the drop in loans (an asset item) are considered “sources of funds” and, hence, must be balanced by a corresponding “uses of funds” item. The November balance sheet shows a SR49.5 billion decrease in “unclassified liabilities”, which is the balancing item. This indicates that banks retired a large part of their other liabilities. These events have reduced the banks’ loans-to-deposit ratio.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)
