Saudi Arabia has not changed its policy rates since the last move reducing move made by SAMA (Saudi Arabian Monetary Agency) in Q2, 2009 in order to counter the effects of the global financial crisis on KSA; the official repo rate and reverse repo rate has been maintained at 2.0 percent 0.25 percent respectively since then. As per Global expectations, the gap between SAIBOR and LIBOR started narrowing down. The LIBOR (US) increased since 2010 by around 28bps while SAIBOR fell by 8bps during the same period leading to a 36bps shrinkage in the gap which now stands at a trivial 7bps as of end Q4, 2011.
The Saudi government's 5-year CDS spreads that peaked to 335bps in February 2009, declined significantly over the rest of the year 2009. The CDS spreads which declined further, though slightly in 2010 despite trivial volatility witnessed a substantial rise during 2011, widening by 56bps. Spreads remained quite volatile during 2011, possibly due to the Arab Spring.
Money supply
The increase in currency in circulation by 26 percent coupled with demand deposits growing by 21 percent resulted in overall M1 growth of around 22 percent in 2011. M1 recorded at SR761 billion continued to dominate the overall money supply (M3) with its contribution at 51 percent. M2 money supply grew slower than M1, recorded at 15 percent due to stagnancy in time and savings deposits. Overall Saudi Arabia's improved liquidity conditions led to broad money supply (M3) growth of 38 percent reaching SR1.49 trillion in 2011. This was due to a spike in other quasi monetary deposits, which grew by 173 percent, the Global report said.
Despite the massive increase in money supply, the risk appetite of banks remained restrained during the year resulting in single digit growth (8 percent) in lending during 2011. The claim of banks on the government and on non-financial public sector enterprises actually saw a shrinkage and growth was only exhibited by lending to the private sector, up 11 percent. A closer analysis of money supply components reveals that the highest annual growth was recorded by other quasi monetary deposits that nearly tripled contributed 66 percent of the change in M3. This was followed by demand deposits that contributed 27 percent of the change in 2011.
Monetary assets
The monetary assets recorded an increase of 17 percent (reaching SR3.21 trillion) in 2011. Despite excessive public spending, net foreign assets saw heavy build up, growing by 22 percent during 2011. SAMA's net foreign assets recorded an increase of 22 percent (to SR2.01 trillion). Net foreign assets of commercial banks grew 36 percent but contributed negligibly to incremental assets due to their sheer size.
Inflation - The Saudi authorities in the recent years have been working actively to control inflationary pressures and to some extent have been successful in getting desired results. Historically, the Saudi inflation has been low ranging between 1.0 percent to 2.0 percent in 2000-05 period. It was during times of strong economic performance and high oil prices that KSA witnessed a surge in annual inflation rate touching the highs of 9.9 percent in 2008 and monthly inflation rate of 11.1 percent in July 2008. The government was able to bring down annual inflation rates to within 5.0 percent to 5.5 percent during 2009 and 2010 and under 5 percent in 2011 (4.7 percent). According to Global inflation is expected to continue hovering between 4.3 - 4.6 percent in 2012.
During 2011, monthly inflation made a high of 5.3 percent in the beginning and then at the ending quarter of the year, while the middle of the year saw the lowest inflation figures. Analyzing the seven main categories of overall inflation, the housing & related items category recorded the highest increase over 2009, growing by 21 percent since then and by 8.0 percent during 2011. Although the annual increase in this category slowed down from 13.0 percent in 2010, it continued to post the highest growth rate amongst the constituents.
The continuing real supply constraints are believed to be the leading drivers and are under the government's radar to be better managed over the coming years. It may not be significant but the annual rental rates to ease off further in 2012, thus taking off some burden from overall inflation rate. However, any pressure arising from higher global commodity prices due to any unexpected events in 2012, could add pressure to the overall inflation. The foodstuffs and beverages is another major category contributing to overall inflation. Since a bulk of land in Saudi Arabia is unproductive agriculturally, the country imports most of its food requirements. The government has been working on number of options to control the food inflation, which includes cultivating abroad and building food reserves.
