JEDDAH – Saudi Arabia's economy is sustaining a healthy positive recovery as the Kingdom's monetary system continues to be awash with liquidity over the past few years as elevated oil prices and increased production resulted in higher revenues, the National Commercial Bank (NCB) said Wednesday in its “Saudi Economic Review” for December. The Saudi Arabian Monetary Agency (SAMA) was able to expand their net foreign assets by 13.1 percent annually to reach a record SR2.66 trillion. The financial system's position is reasonably strong to withstand any external shocks whether regional or global as SAMA's prudent guidelines directed banks to safer grounds. Following 32 months of consecutive annual gains, the monetary base (M0) recorded its annual contraction of 9.7 percent, settling at SR302.5 billion. While the base effect greatly contributes to the decline, which we expected in our previous report, M0 also declined on a monthly basis by 0.9 percent. Bank reserves recorded a large drop during October, falling by 19.6 percent Y/Y. Banks' deposits with SAMA, which constitute over 80 percent of bank reserves, decreased by SR35.8 billion over the past twelve months. Moreover, cash in vault settled 10.6 percent lower on an annual basis to SR24.2 billion. By the end of last year, banks' excess reserves ratio which is represented by deposits with SAMA other than statutory deposits reached 64.6 percent given the liquid state of the market. The ratio plunged to 40.5 percent during October as banks opt to utilize their assets by offering credit coupled with the government's attempt to contain liquidity by issuing T-bills. Additionally, currency outside banks reached SR144.2 billion, an increase of 4.5 percent annually, as the crackdown on illegal workers spiked cash handling. The money supply (M3), growth decelerated accordingly to 10.4 percent Y/Y from 13.4 percent during the previous month. Demand deposits, the largest component of M3, was the main driver as it expanded by 16.4 percent during October. The non-yielding asset is favored by businesses and individuals as time and savings deposits were al most stagnant with a minor increase of 0.4 percent annually. As the US contemplates tapering in the next couple of months, we expect time and savings deposits to remain relatively stable as investors assess the effects on interest rates and the bonds market. The smallest component of M3, other quasi-monetary deposits, accelerated by 9.2 percent Y/Y. rebased headline inflation rate recorded its third annual deceleration as the index posted a 3.0 percent annual rise. Domestic consumer prices have been somewhat contained and within an acceptable range given the economic expansion experienced in the local economy. The Reuters/Jefferies CRB index, a global commodities gauge, dropped 2.7 percent during October. Accordingly, the foodstuff sub-index decelerated to 5.2 percent, the lowest level in eleven months. – SG
