The pace of slowdown in monetary growth is likely to moderate in 2016, following its rapid slowdown towards the end of 2015. Although monetary and banking data was positive, it indicated a slowing trend during 2015, Jadwa Investment said in its Monetary and Financial Update for this month. "The current series of sovereign bond issuances should reassure investors of the government's commitment to maintain a high level of spending on the economy." Nevertheless, according to the report, the psychological impact of this deterrence would still mean that the slowdown will persist in 2016. The US Federal Reserve's decision to raise interest rates in December 2015 has been down to anticipated rises in inflationary pressure as slack in the labor market is slowly diminishing. The report states that the recently released economic data, which showed that the US economy grew by a meager 0.7 percent in the final quarter of 2015, will force the Fed to embark on a gradual interest rate tightening cycle in the coming year. According to the report, year-on-year growth in credit to the private sector stood at 9.9 percent in January, up from 9.8 percent in December but slower than 11.7 percent during the same period in 2015. Jadwa Investment forecast credit growth to further slow during 2016, putting the full year expansion in credit at 6 percent. "We see that this trend is consistent with our view that the slower growth in private sector activity is translating into lower expansion in credit. Nevertheless, spending by the government will continue to be the growth driver for credit to both consumers and corporations despite the projected slowdown, while regional geopolitical risk and the external economic environment present downside risks on general market sentiment." The Kingdom's net foreign assets (NFA), which includes NFA for both SAMA and commercial banks, fell by $17 billion in January, and follows a $97.7 billion decline in 2015 to reach $652 billion. The majority of this fall came from SAMA's NFA, which continued to constitute 91 percent of total NFA as of January. Meanwhile, commercial banks reduced their NFA by $2.4 billion in January. As for the implication on growth in monetary aggregates, the fall to NFA was countered by a rise in Net Domestic Assets (NDA), reducing the extent of the slowdown in the money supply. SAMA's NFA continued to face downward pressure in January. Foreign exchange reserves fell by $14 billion over the month to reach $598 billion in January, compared to net additions of $1.5 billion and $2.5 billion during the same period in 2014 and 2015 respectively. FX reserves continued to be impacted by falling oil prices, with Brent averaging $38 per barrel (pb) and 31pb in December and January respectively (Figure 8). The Kingdom's oil output remained at near record levels in January, with exports rising to around 7.5 mbpd in December. Looking ahead, we see more issuances of domestic sovereign debt to keep the pressure off foreign reserves in financing the fiscal deficit, but there is a risk stemming from the deficit in the current account, which could act as a pressure point on foreign reserve withdrawals. Within SAMA's foreign exchange reserves, deposits with foreign banks fell by $11 billion in January. This decline was likely due to a transfer of funds to the domestic economy for direct spending. Investments in foreign securities fell by $3.5 billion in January. These investments recorded a notable fall of $131.4 billion during 2015. This was steeper than the fall in the overall stock of reserves during 2015, meaning that a considerable amount of these investments was reallocated to deposits with foreign banks. This reallocation of funds have caused the share of reserves with foreign banks to increase from 25.6 percent during the beginning of 2015 to 32 percent of total reserve assets in January 2016. "We view this as SAMA's preference to hold more liquid assets abroad in order to meet the financing needs of the government," Jadwa report noted. Nonetheless, normalization of monetary policy in the US should theoretically translate into lower growth in bank credit to the private sector within the Kingdom. This should eventually reduce the potential growth of the non-oil sector. The likely transmission would be through higher repo rates in the Kingdom. This is a particular cause for concern given the negative sentiment surrounding the slowdown in spending by the government, which itself is adding to the cost of borrowing, given the recent rise in the 3-month Saudi Interbank Offer Rate (SAIBOR). According to the report, higher rates will benefit banks through higher profitability, since a large proportion of their liabilities are denominated in non-interest bearing demand deposits. Previous incidences showed that interest rate pass-through effects have been minimal on demand for credit, and that government spending is the main catalyst behind such growth in demand for credit. Nevertheless, the report states, that SAMA will be cautious in responding to such changes in US interest rates. It goes on to add that the spread between Saudi and US policy rates are not expected to be lower than what it has been since 2008. — SG
