Bank credit growth, while improving, continues to fall
far short of double-digit levels of 2007 and 2008 as banks continue to adopt a
watchful attitude toward extending new credit and demand from the private
sector remains subdued.
While Saudi Arabia has adopted the largest fiscal
stimulus as a share of GDP in the G20, it remains to be seen is when the
private sector's investment appetite will pick up.
A good signal in the June data was a 3 percent annual
rise in private sector bank credit to SR728.31 billion, on par with its growth
in May. As recently as January, annual credit growth was below 1 percent, so
the turnaround in June is notable as it marks the sixth month of growth in
private sector bank credit. Banque Saudi Fransi expects an incremental increase
in private sector claims in the second half will support our forecast for
annual growth of 8 percent by December. There are some minimal and short-term
downside risks to credit growth in August and September due to the holy month
of Ramadan, when business activity tends to slow down.
Bank claims on the private sector rose almost 1 percent
in the month to June to SR760.35 billion - while year on year, the growth rate
of 4.4 percent was fastest in 10 months. That figure includes bank credit and
an 8.5% monthly rise in private security investments.
In June, SABIC (Saudi Basic Industries Corp.) secured
SR4.5 billion in financing from National Commercial Bank, while Aramco and
France's Total completed $8.5 billion in financing in for their joint refinery
at Jubail, 47 percent of which was financed by state-linked entities. A healthy
projects pipeline will continue to support modest rates of credit growth for
the remainder of the year. Petrochemicals firm Saudi Kayan Petrochemical
Company has said it would seek bank credit to help bridge a $2.4 billion rise in
building costs for a petrochemical complex.
Credit to public sector enterprises rose almost 10
percent in the month to June to SR31.26 billion, having contracted 5.3 percent
in May. Year on year, public sector credit was down 8.7 percent.
Bank deposits also posted healthy growth in June. Total
deposits rose 2.3 percent in the month to SR943.16 billion - taking them back
to end-2009 levels.
After falling 22.6 percent in the first four months of
2010, foreign currency deposits grew 5.1 percent in May and June.
Demand deposits accounted for 51.4 percent of overall
deposits at the end of June, compared with 46.1 percent in December and 42.6
percent a year earlier. In June, demand deposits grew 4.2 percent from May to
SR484.51 billion, up 24 percent year on year, SAMA data show. Time and savings
deposits, alternatively, declined year on year for the eighth straight month,
falling 12.7 percent in June to SR304.05 billion, off 1.3 percent from May
levels.
The growth in deposits has not, meanwhile, been matched
by higher lending. Saudi Arabia's loan-to-deposit ratio fell slightly to 80.5
percent in June from a seven-month peak of 82.3 percent in April. The
loan-to-deposit ratio, which hit as low as 78.4 percent in December, had risen
above 90 percent in late 2008.
M3 grew 3.4 percent year on year to SR1.04 billion, a 2.3
percent expansion on the month earlier - the biggest month-on-month improvement
in 16 months.
From January to June, growth in M3 averaged 4.5 percent,
compared with 14.2 percent in 2009 and 21.2 percent in 2008. The Kingdom's
monetary base - which includes highly liquid currency in bank deposits and held
by the public - also grew 2 percent in the month to June to SR229.88 billion,
up 7.3 percent year on year.
With oil prices holding above $75 a barrel, SAMA has been
able to keep building its store of net foreign assets, although in June the
central bank drew them down 0.2 percent from May. Oil prices averaged $75 a
barrel in June and they are on track to rise at above $76 a barrel this month.
These levels support stimulatory public spending and raise expectations the
government will post a fiscal surplus this year in line with our expectation
for a budget surplus of 3 percent of GDP.
SAMA's net foreign assets stood at SR1.56 trillion at the
end of June, up 6.6 percent from the year earlier. Foreign assets are still
SR106 billion lower than they were at a peak in November 2008, but SAMA quickly
replenished its holdings this year as oil prices returned to healthy levels.
SAMA has drawn down its foreign assets periodically to finance a stimulatory
deficit-spending program. In June, SAMA drew down its investments in foreign
securities by 0.9 percent while it boosted deposits with banks abroad by 1.7
percent.
In a signal that commercial banks are also unwilling to
part with liquidity, their net foreign asset holdings grew 11 percent month on
month to SR116.46 billion, the highest level at any point in the last two and a
half years. Bank deposits in the central bank's reverse repo window expanded
1.4 percent to SR73.4 billion.
Cumulative profits of Saudi banks, weighed by slow loan
growth and higher provisioning, fell 12.2 percent in the second quarter,
according to SAMA data. Non-performing loans as a proportion of total loans
have increased from 2.1 percent in 2007 to 3.3 percent now - but these rates
are lower than the UAE (4.6 percent), Kuwait (9.7 percent) and Bahrain (3.9
percent) according to IMF estimates.
(John Sfakianakis is chief economist at Banque Saudi
Fransi, Riyadh.)
