JEDDAH – In the face of a globally adverse environment, Saudi's monetary policy has been a supporting factor to the overall growth of the economy. The National Commercial Bank, in its "Saudi Economic Review" for the month of July 2012, said although the monetary base (M0) reached an all-time record in January 2012, the pace of growth has slowed over the past three months to single digit figures. "Over the short term, we expect to see a global downturn marked by overall currency devaluations as world economies sustain the blows from the Euro zone being offset by positive indicators rising from increasing quantitative easing expectations," the report said. During May, M0 increased at annual rate of 6.1 percent while decreasing by 6.5 percent on a monthly basis. The contraction is due to a withdrawal of over SR20 billion in deposits with SAMA. Further analyzing SAMA's monthly bulletin reveals an upsurge of SR9.5 billion in local banks' total foreign assets mainly driven by due from branches abroad. Additionally, the recent local pick up in lending is expected to continue, thus utilizing large dormant cash levels. The aforementioned contributed to the fourth consecutive monthly slowdown in money supply (M3) which grew by 7.7 percent Y/Y during May. However, time and saving deposits have recorded back to back annual declines from November 2009 for 25 months due to globally suppressed interest rate environment, but have rebounded and managed to record their sixth monthly gain at 1.9 percent in May. Moreover, demand deposits made record gains albeit at a slower pace and represent a share of 54.1 percent of M3, a record share. We expect the levels of demand deposits to continue outpacing time and saving deposits until European leaders structurally resolve their regional debt crisis and the global economy regains confidence to raise interest rates, which are bound to be a medium-term target. As for inflation, prices have cooled to an annual rate of 5.1 percent during May following a peak of 5.5 percent during February this year. As a worrying concern for consumers and the government alike, real estate and rental prices have been slightly fueled by the summer holidays. The category of renovation, rent, fuel & water posted a rise of 9.2 percent for May, matching April's rate. Prices are expected to ease once the academic year begins. Additionally, food prices have posted a gain of 4.8 percent Y/Y and are expected to remain elevated as businesses build up their stocks in preparation for the holy month of Ramadan. Furthermore, the Standard & Poor's/Goldman Sachs Agriculture Index gained 11 percent during June, indicating higher imported inflation for the coming months as Saudi imports a large amount of food and beverages. Furthermore, the trade weighted dollar has lost 1.7 percent last month intensifying pressures on imported inflation. As for the current policy rate, officials are expected to keep the benchmark interest rate at 2 percent as its policy is paralleled to the US's. "We believe prices will hover around the 5 percent level for the remainder of the year as the government maintains an expansionary fiscal policy." SAMA has not announced any measures of attempting to further subdue the inflation rate, adopting a wait and see approach, yet, SAMA is keeping an eye that lending has started to regain momentum. On the financing front, total claims of the banking system, excluding T-bills and government bonds, posted a fifth consecutive increase in growth to reach 14.7 percent Y/Y in May at SR921.5 billion. Unlike previous years, so far this year the loans portfolio accelerated at a faster pace than the flows of deposits into banks. Furthermore, credit to the private sector gained 13.1 percent on an annual basis, indicative of the strong private business growth, which will reflect on the economy. Fresh lending was focused towards the consumer and credit cards category as witnessed in 2011, which are expected to carry forward into 2012 given the ample opportunities in the retail segment. The newly approved mortgage law will allow banks to penetrate a huge demand in housing market. Meanwhile, aggregate claims on the public sector dropped by 12.3 percent Y/Y due to a sharp contraction in T-bill levels. During May 2011, T-bills recorded its highest level at SR176.9 billion due to efforts by SAMA to mop up excess liquidity in the market. This year, T-bills posted SR129.4 billion, dropping almost 27 percent, this led to the noticeable drop in credit to the public sector. Local banks continue to struggle with maturity mismatches as a large portion of their credit resides in short -term financing. The share of short-term bank credit is still relatively high as it currently stands at 58.5 percent, albeit lower than the record high level of 65.1 percent during March 2009. Long-term maturity credit holds a share of 24.1 percent, while medium-term credit presents the remaining share. Given the vast amounts of large projects, banks are constrained by asset/liability mismatch and are unable to expand their balance sheets with long-term assets. Accessing the capital market, locally or internationally, with issuances of long-term debt will lure investors in opting to supply the banks with the needed long-term liability in Saudi riyals or USD to remedy the constraining funding base. The interbank market remains subdued owing to the extremely low policy rate taken by SAMA. – SG
