JEDDAH — Saudi Arabia's monetary situation continues to expand while inflationary pressures remain subdue, a trend that had been witnessed since March 2012, the National Commercial Bank said in its November monthly “Saudi Economic Review” released Tuesday. Saudi's monetary base (M0) recorded an annual gain of 14.3 percent during September as it reached SR287.8 billion. The main contributor to growth was, yet again, deposits with Saudi Arabian Monetary Agency (SAMA), which rose by 20 percent Y/Y, the fastest pace since January this year. Additionally, cash in vault grew at 21.4 percent during September over the same month last year while dropping 9.8 percent on a monthly basis. The final item of M0, currency outside banks, gained by 7.8 percent Y/Y as Hajj preparations were in full gear. The rising pace of M0's growth is expected to continue for October, while decelerating for November and December figures as Islamic rituals end and the record levels from the period between Dec-Apr offset the steady and controlled pace witnessed currently. It will also ease any pressures on local prices which have already been on a downward trend for the past eight months. The money supply (M3) undoubtedly has a positive correlation with M0. Consequently, M3 recorded a rise of 11.4 percent annually by the end of September to reach an all-time high at SR1.31 trillion. On an annual basis, demand deposits unsurprisingly outpaced time and savings deposits by posting a gain of 14.4 percent and 1.5 percent, respectively. However, on a monthly basis, demand deposits dropped by SR6.8 billion while time and savings deposits added SR10.4 billion for September. The expansion in the depositary base continues to aid the growth of credit domestically for the private and public sector. Furthermore, other quasi-monetary deposits rapidly accelerated at 20.8 percent Y/Y, the highest growth rate since January 2010 which is in line with growth in Saudi trade. Given the utilization of liquidity witnessed recently, we expect M3 to post an annual gain of 9.75 percent for 2012, revised down from 10.9 percent and decelerating further in 2013 to 7.76 percent. Consumer prices have dropped, as expected, to 3.6 percent Y/ Y in September from 3.8 percent Y/Y during the previous month. The drop is largely due to base effects specifically from the “other expenses and services” category which contracted by 0.4 percent on an annual basis. Food prices have regained their pace to record a gain of 4 percent with further increases expected in the coming months. A subcategory of food, tobacco, rose by 21 percent for September as local authorities intensify their fight against smoking by imposing price hikes on cigarettes and a recent ban on indoor smoking. In anticipation of the delayed codifying of the mortgage law, rent prices slowed for another month to 8.0 percent Y/Y from 8.5 percent Y/Y during the previous month. The inflation rate is likely to remain below the 4 percent level towards the end of 2012. However, the NCB report forecast that domestic prices will regain pace by January given the robust growth of the economy and its highly liquid state. Moreover, growth in banks' deposits continues to provide opportunities to expand the financing capabilities of the banking system. The depositary base of Saudi banks has reached SR1.18 trillion during September according to the latest SAMA bulletin, a rise of 11.8 percent over the same month last year. The deposit distribution for businesses and individuals reflects the low interest rate environment as 71.3 percent reside in demand deposits while time and savings deposits and foreign currency deposits hold 19.2 percent and 9.6 percent, respectively for the month of September. Meanwhile the government's composition indicates a cautious and long-term investment horizon given the shares of demand, time and savings, and foreign currency deposits at 16.0 percent, 49.0 percent, and 35.0 percent, respectively. The readily available deposits remain to be preferable as the lack of attractive yields continues. The combined loans portfolio for local banks reached an all-time high during September at SR973.2 billion, a 16.2 percent gain over September 2011. The pace of credit growth in the Saudi economy is gaining momentum and reaching growth levels of early 2009 as banks feel more comfortable to take on risk. The maturity of credit maintains its direction toward the medium term category by reaching a share of 17.9 percent, adding SR37.7 billion since the beginning of the year. The flow confirms local banks' shift to finance SMEs in an attempt to grasp a premature segment as medium term credit recorded a substantial gain of 30.6 percent during September. Short term funding still holds the largest share at 57.1 percent with an annual gain 14.7 percent and long term credit posted a growth of 10.7 percent Y/ Y. The strong growth in lending this year and the, relatively sluggish, pace of deposits has aided the loans to deposits ratio to 82.5 percent from 77.6 percent last year. The credit portfolio of Saudi banks continues to be largely compromised of the commerce sector which holds 20.7 percent of banks' total financing, SR201.7 billion. The commerce sector recorded the slowest growth rate at 1.4 percent Y/Y as the banking sector pursues diversification. Meanwhile, the second largest financed sector, manufacturing and processing, has regained its momentum by growing at 16.9 percent Y/Y during 3Q12 following an 11.7 percent Y/Y growth for 2Q12. Additionally, the vast mega projects in mining and quarrying have been captured by local banks, albeit marginally due to the inability to finance huge long term deals. Credit for mining and quarrying has almost doubled in a span of two years and has recorded a growth 43.7 percent Y/Y by the end of September. Furthermore, the need of the Saudi economy to expand on utilities, such as water and electricity, has supported local banks on the financing front. The electricity, water, and healthcare sector is financed by banks with an amount of SR32.2 billion as of September 2012 and the figure is expected to continue its sizable growth. The estimated consumption of electricity is estimated at 240,296 GW for 2012 and expansionary plans are needed to meet the estimated consumption of 289,437 GW by 2015. The building and construction sector financing is also on a positively steep trajectory and is likely to continue once the mortgage law is codified. — SG
