JEDDAH – The banking system is expected to soften the pace of credit to avoid overheating their balance sheets, the National Commercial Bank (NCB) said in its “Saudi Economic Review” for this month. It said the pace of credit will slightly moderate during 2013. However, deposits in the Saudi financial system are more than adequate to accommodate the rising credit market and its potential, it noted. The depositary base of Saudi banks has reached SR1.27 trillion during January, according to the latest SAMA bulletin, a rise of 13.7 percent over the same month last year. Representing the largest portion of deposits, demand deposits have increased their share to 60.2 percent by an annual gain of 15.5 percent. Businesses and individuals have added 11.9 percent Y/Y to their demand deposits while government entities amassed a staggering 87.8 percent on annual basis. “The suppressed interest rate environment continues to keep investors away from time and savings deposits,” NCB said. SAMA's policy is likely to mirror that of the US's; consequently, “we do not foresee any changes before 2014.” However, time and savings deposits managed to increase by 9.1 percent Y/Y during January to reach SR323.4 billion. Interestingly, it is still below the peak level recorded by the end of 2008 at SR367.6 billion. Furthermore, other quasimonetary deposits increased at an annual 14.9 percent as foreign currency deposits expanded by 12.8 percent during January. Saudi banks' combined loans portfolio rises for another month to reach SR1.01 trillion, setting an annual rate of 16.3 percent Y/Y for the month of January, a slight deceleration over the previous month. The robust economy facilitated the possibility of maintaining an elevated level of credit expansions as investments increase within the Kingdom. Local banks are expected to maintain the current level of credit with a more selective approach for 2013. Medium- and long-term credit is outpacing short-term credit growth, the report said. Despite dropping marginally on a monthly basis, medium term credit grew by 41.6 percent annually by reaching SR196.9 billion, a level that has been doubled since March 2009. In addition, long-term credit accelerated at an annual pace of 16.5 percent during January to raise its share of total credit to 26.8 percent from 26.3 percent during December. Representing the bulk of credit, short-term credit stands with a share of 53.7 percent following its 9.2 percent Y/Y growth. As for the private sector, total claims expanded by 16.0 percent on an annual basis during January. “The banking system is expected to soften the pace of credit to avoid overheating their balance sheets. In our opinion, the pace of credit will slightly moderate during 2013,” NCB said. Furthermore, credit to the public sector gained 6.8 percent Y/Y as treasury bills recorded a gain of 13.5 percent annually. The risks from excess liquidity remain subdued, thus, SAMA will continue their wait-and-see approach. The growth of lending has once again outpaced deposits which contributed to the rise of the loans-to-deposits ratio to 79.9 by the end of January. As for the interbank rate, SAIBOR, the subdued interest environment will aid banks in avoiding any liquidity shortages by allowing to access funds cheaply. However, given the rise in credit which translated into larger liquidity movements, the differential between SAIBOR and LIBOR has widened to over 70bps. The pace is far from worrying as SAMA is closely monitoring risk indicators for the Saudi financial system. SAIBOR is expected to hover around 100bps. In 4Q 2012, both settled and opened letters of credit (LCs) reflected the vibrancy of the Saudi economy. Settled LCs recaptured the momentum which it lost briefly in the third quarter, posting 26 percent Y/Y increase. It ensured continued resilience to global economic and political turbulences affecting the US, Europe, Middle East, and some of the major emerging economies. The largest importing country group was the GCC, with a 44 percent boost over the previous year, followed by Arab countries posting a 101 percent annual surge. North American settled LCs stumbled by 37 percent Y/Y, and Western European settled LCs shrank by 60 percent compared to last year, while keeping a steady, low discrepancy ranging between the value of tens to hundreds of million riyals. Supported by the recent strengthening of the greenback, lower prices of imports encouraged demand for LCs. Save for North America, in which imports to the kingdom remain highly volatile, Q/Q figures of opened LCs display the same pattern as their settled counterparts, indicating no deviation from nominal value trends. Year 2013 started off with settled letters of credit (LCs) registering a 0.9 percent Y/Y decline in the month of January. Apart from October's figures, this is not in line with the general upward trend that was noticeable throughout last year. Most of the decline stems from the fact that last year's figures were well above-average due to the spike in government contract awards. Given the heavyweight nature of categories such as machinery and building materials, and “others” which constitute at least 74 percent of total LCs, an annual shrinkage of 21.3 percent, 13.9 percent, and 16.6 percent respectively left only motor vehicles, and foodstuff with a positive note of 42.3 percent and 58.2 percent Y/Y, soothing the overall downbeat figures. Compared to the previous month, settled LCs also reflect a downward movement led by a 3.1 percent decrease in motor vehicles and a 41.3 percent downturn in appliances. The positive figures from food stuff and building materials helped mitigating the overall downside trajectory to record a net change of -5.7 percent. From a forward looking outlook, newly opened LCs fell by 3.5 percent, affected by a shrinkage in machinery, building materials, and foodstuff by 36 percent, 28 percent and 35 percent, respectively. However, a 22 percent surge in motor vehicles managed to moderate the downward behavior. On a month-to- month basis, overall settled LCs rose over December's figures by a margin of 4 percent. Although all of the major categories posted a negative growth, a 41 percent surge in the category labeled as “others” appears to have cushioned and even counter-balanced the downturn. Motor vehicles receded by 6 percent, followed by machinery, building materials, and foodstuff with each dipping by 37 percent, 15 percent, and 47 percent respectively. Moreover, the study said strong private and public investment and consumption spending will support growth in non-oil sectors, particularly construction, manufacturing, and retail trade. Real GDP growth is expected to rise by 3 percent in real terms, driven by the vibrant non-oil sector that will offset the decline in oil production. Growth in the non-oil sector will remain above the 7 percent threshold in 2013. Real non-oil GDP in 2012 grew by around 7.2 percent, which is higher than the 10-year average of 4.7 percent, largely driven by the stellar performance of the non-oil private sector. The main drivers of private sector growth were the construction, manufacturing, and the retail sectors, which posted 10.3 percent, 8.3 percent and 8.3 percent annual growth, respectively. This vibrancy of the private sector emanated from the royal decrees, the enhanced business confidence, and the improved financing environment. Strengthening of domestic demand is reflected in a rise in private-sector credit and the double-digit growth in merchandise imports. Evidently, the growth in manufacturing and construction benefited from the pickup in credit, receiving SR14.5 billion and SR5.6 billion, respectively, in incremental loans and advances from banks in 2012, which represents an annual increase of 13 percent and 8 percent. Construction and manufacturing will remain the key beneficiaries in 2013, growing at 10.5 percent and 8.5 percent, respectively. The projections for the two sectors are supported by buoyant activity in the projects' market and strong business confidence. During 2012, the value of awarded construction contracts remained above the SR200 billion threshold, registering SR235 billion, albeit falling short from the historical record of SR270 billion in 2011. The awarded contracts in the manufacturing sector reached SR17.8 billion in 2012, the fourth largest share across all sectors, surpassed only by the oil, transportation and power sectors. Additionally, foreign direct investment inflows are expected to have crossed the $20 billion mark in 2012. Implementing broad-based structural reforms over recent years has largely improved the Kingdom's business environment and its attractiveness for foreign capital inflows. NCB study forecast that FDI will continue to be one of the driving forces behind higher investment spending in the Kingdom, with the share of FDI in gross fixed capital formation (GFCF) registering 14.9 percent in 2011, significantly higher than the 1.5 percent average rate posted during the period 1995-2004. – SG
