The month of Ramadan usually coincides with a slight slowdown in commercial activity as companies observe shorter working days and take a week-long holiday to celebrate Eid Al-Fitr marking the end of the month of fasting. Growth in outstanding bank credit to the private sector, excluding investments in private securities, fell to 1.7 percent year on year in August from 3.4 percent in July, the slowest pace of growth since March. Total bank claims on the private sector witnessed growth of 3.3 percent in August, down from 4.9 percent a month earlier, SAMA data show.
Private sector claims have risen 4.4 percent since December levels, but growth momentum remains weak. Credit classified as short term rose 1.3 percent in August, while medium and long-term loans fell in value. Banks are unlikely to see a substantial revival in credit until there is good growth in long-term project financing, which we expect will take place in 2011 and 2012.
There was also a notable decline in deposits of 1.8 percent from July to SR925.87 billion, which led to a rise in the loan-to-deposit ratio to 82.6 percent from 80.8 percent the month earlier. Deposits fell broadly; foreign currency deposits dropped 7.2 percent from July, time-and-savings deposits eased 0.9 percent and demand deposits declined 1.1 percent. Demand deposits accounted for 53.1 percent of the total in August, up from 46.1 percent at the end of last year.
Despite a continued acceleration in inflation to an 18-month peak of 6.1 percent in August, Saudi Arabian money supply growth remains muted. Overall broad money (M3) fell 1.1 percent in August from July to SR1.02 trillion, although the annual growth rate rose slightly to 2.9 percent from July's 2.3 percent. M2 money supply growth was higher at 6.2 percent in August.
From 2005 to 2009, M3 growth rates had consistently been in the double digits, leading to a more than doubling of money supply over that period.
Banque Saudi Fransi expects that money supply growth likely resumed at a faster pace following Ramadan, although not at a level that would trigger additional inflationary pressures in the short term. Food inflation at a 19-month peak of 8 percent in August, rents, and general goods and services prices are the main drivers of inflation at the moment.
The Saudi monetary base, comprising highly liquid currency in bank deposits and held by the public, also declined slightly according to SAMA data.
Fiscally speaking, Saudi Arabia is benefiting from higher oil prices and stronger energy demand from Asia, the destination of a majority of its exports. Net foreign assets held by SAMA rose 9.7 percent in August to SR1.57 trillion ($419 billion), the highest annual growth rate since April 2009. To put this into perspective, growth in net foreign assets had peaked at nearly 68 percent in August of 2008, a month after oil prices touched a climax of almost $150 a barrel. The Kingdom drew down foreign assets in 2009 to finance a stimulatory spending program designed to keep the economy moving despite the decline in oil prices and output. This year, SAMA has added SR53.7 billion ($14.3 billion) to its foreign assets, which comprise a combination of foreign security investments and bank deposits. In August, SAMA's investments in foreign securities rose 4.9 percent, taking their 2010 gains to 7.4 percent. Deposits with banks abroad witnessed a year on year jump of almost 33 percent.
With the improved macroeconomic backdrop and state stimulatory spending continuing to drive the economy, there has also been a return in consumer activity. Inflation in the "other goods and services" category hit 8.5 percent in August, consistent with anecdotal evidence of an upturn in domestic demand among Saudi Arabia's 27 million residents. The value of point of sale transactions in August rose almost 31 percent from the year earlier, while the amount of commercial and personal checks grew 15.7 percent.
Trade flows, meanwhile, have slowly improved in 2010. There was a 41.4 percent annual rise in new letters of credit issued in August, including a 23.3 percent rise in letters of credit taken to finance imports of automobiles, representing a quarter of the total. LCs for financing food imports more than doubled while those taken for building material imports grew 34 percent, SAMA data show.
