Despite a favorable oil price environment of between $70-$80 a barrel continuing virtually uninterrupted so far this year which refueled commercial activities and revived business confidence, still a tight bank credit policy remains a cause of concern. The Banque Saudi Fransi said in its latest report on the Saudi economy released on Tuesday that “the greatest uncertainty about when the recovery will accelerate in the Kingdom continues to be the revival of bank credit, which remained subdued in the first month of 2010.” However, the choke on bank credit in 2009 at Saudi banks was not a matter of tight liquidity conditions but a “reflection of both risk aversion among banks and deleveraging among private sector companies adjusting to economic conditions that caused an economic boom in Gulf Arab nations to unravel quickly.” Bank credit to the private sector grew a monthly 0.2 percent in January following a contraction in December. Credit to the government, meanwhile, fell 0.2 percent - both data reflecting a combination of continued hesitation among banks to extend new credit and the propensity of private sector companies to wait on the sidelines as they focus on deleveraging, not expansion, the banks,” Dr. John Sfakianakis, chief economist of Banque Saudi Fransi said in the report. “With bank credit conditions subdued, we find it unlikely that SAMA will revise interest rates this year,” he said in the report. Nonetheless, there are early signs that banks could be loosening their stronghold on extra cash. In January, commercial banks drew down their foreign assets by 10.9 percent from December to SR187.92 billion, following four straight months of gains. Bank deposits in SAMA's reverse repo window also slipped 0.6 percent in the month to January, SAMA data show, while bank deposits in SAMA's statutory and current deposits climbed over the same time frame. “Should this trend continue, we would expect to see a pick up in month-on-month growth of private sector lending,” the report noted. SAMA data also signal some return in domestic demand has taken place. Total commercial and personal checks, registered a 7.1 percent year-on-year rise in January to SR41.65 billion - down from a 2009 high in December of SR64.5 billion. Meanwhile, the number of point of sale transactions rose 12.8 percent in January from the year earlier, their value jumping by 20.8 percent to SR5.08 billion. The central bank has kept its repurchase rate at 2 percent for more than a year and its reverse repurchase rate at 0.25 percent since June. Keeping rates low has done little to hearten bank lending, with lenders preferring to keep their excess cash with SAMA or in foreign bank deposits in 2009. Commercial bank deposits held with SAMA's reverse repo window jumped 37 percent last year, the same rate of growth recorded in banks' foreign asset holdings, the report added. Money supply numbers also demonstrated the cautious atmosphere. Growth in broad money, measured as M3, slowed for a fourth month to 8.3 percent in January, a decline in 2.3 percent from December levels. M2, which measures money held in cash, checking and savings accounts, also fell 0.6 percent month-on- month in January. The annual growth rate was steady at 6.5 percent, having declined steadily from peak growth rates above 22 percent in mid-2008. The money multiplier fell to 4.03 in January from 4.14 in December. “It will be difficult to expect money supply to make significant increases without an improvement in bank lending,” the report said. The contribution of money supply growth to inflationary pressures is and should remain minimal for the short term, with the key driver of inflation continuing to be rents and, more recently, the acceleration in food price inflation. The report further noted that rental inflation slowed to 12.6 percent in February from 13.8 percent in January, marking the lowest pace of annual inflation in rents since August 2007. Rents began accelerating quickly in the second half of 2007 until they peaked at 23.7 percent in July 2008. Though supply bottlenecks are very slowly being rectified in the Kingdom's residential real estate market, it will take years before a mismatch in demand and supply for property is bridged, the repot pointed out. Despite the decline in rental inflation, Saudi Arabia's inflation rate jumped to 4.6 percent in February, the highest level since June, due to the increase of food and beverage inflation to 4 percent, the highest level in a year. Data of the Food and Agriculture Organization (FAO) show global food prices have been on an upward track since the summer, although they eased slightly in February. For the time being, we are sticking to our forecast that annual inflation will fall to 4.3 percent this year from 5.1 percent in 2009, with risks to the upside depending on the pace of increase in global commodity prices, the performance of the dollar versus other currencies and the real estate supply situation at home. At the moment domestic retail appetite is a mixed bag. Monetary data overall support the view that guarded optimism continues to be the name of the game, the report further said. “2010 is shaping up to be a year of reasonable oil prices (enabling twin fiscal and current account surpluses), heightened inflationary pressures, and downside risks to economic growth should the bank credit situation not improve in a marked way,” Sfakianakis pointed out. On the upside though, despite some “plausible risks” to economic growth forecast of 3.9 percent for 2010, BSF report said that bank lending to the private sector will rise 8 percent this year, following a stagnant 2009, with most of the revival in lending likely to happen in the second half of the year. “Already, there are signs that banks could begin parting with their excess liquidity through new loans rather than safeguarding them in low interest deposits with the SAMA and abroad, mostly on an overnight basis.” After soaring during 2009, commercial bank foreign asset holdings declined almost 11 percent in January from December levels. Commercial and personal checks in value and volume, and point of sale transactions continued to strengthen into 2010, signaling a gradual return in domestic demand, the report added. Moreover, robust oil prices will enable the Kingdom to balance its fast-expanding budget and finance oil and gas capacity expansion plans. Supposing there are no significant shocks in the global economy that would disrupt supply, oil prices are likely to remain within the $70-$80 band for the coming months, the report said. Foreign trade flows are a useful indicator for domestic demand appetite and trends in global trade. World imports in the fourth quarter grew 8.5 percent from third-quarter levels, according to the latest World Trade Organization (WTO) data. The pace of annual decline in imports also eased considerably in the last three months of the year, falling just 1 percent from the year earlier, compared with annual drops of 26.3 percent and 32.9 percent in the two prior quarters. Asian countries supported the advancement in trade numbers, with imports rising an annual 5.8 percent in the three months, WTO data showed. A pickup in imports was also noticeable in Saudi Arabia, a major importer of foodstuffs, cars, building materials and electronic goods to cater to its desert climate and population of about 25 million. December was the best month of 2009 for both imports and non-oil exports, according to data of the Central Department of Statistics and Information (CDSI). Imports during December rose almost 25 percent from November levels to SR31.7 billion, including a 32 percent rise in both machinery and electronic imports and transport equipment to SR8.99 billion and SR6.39 billion, respectively. CDSI data, which are preliminary, indicate full-year imports stood around $86.7 billion, down almost a fifth from 2008 levels. “Our forecast was for imports to drop to $89 billion in 2009, reflecting a slowdown in domestic demand that accompanied subdued economic growth conditions in the region and globally.” The report also noted that cargo arriving to and leaving from Saudi Arabia's eight ports also slowed in 2009, although a pickup has been notable since the final months of last year. A total of 58.25 million tons of cargo were discharged from Saudi ports in 2009, down 14.6 percent from the year earlier, Saudi Ports Authority data show. The main factor behind this decline was the 27.2 percent drop in shipments of construction materials, which comprised 18.1 percent of total cargo arriving in the Kingdom last year. The downturn in consumer demand was evident in the fall in new car sales. Vehicle shipments arriving at Saudi ports declined 20 percent in 2009 while consumer goods fell 5.3 percent. By contrast, food shipments, comprising 32 percent of total cargo moving into Saudi Arabia through its ports, climbed 0.2 percent in 2009, thus cushioning the overall decline. Demand for food is not expected to ease in a country whose population is growing at an annual 2.5 percent. So far, 2010 is slowly turning the page on a rough 2009. Saudi Ports' data for January show a 14.8 percent year-on-year rise in total cargo arriving to and discharged at ports. “We anticipate imports will rise to about SR94.7 billion in 2010, with scope for upward revision if import flows continue strong momentum.” Letters of credit (LCs) data also illustrate the upturn in commercial activity in the past few months, with new letters of credit taken against imports up 28.6 percent in January from December. New LCs were 12.9 percent higher than January 2009, according to SAMA data. Leading the advance were machinery imports financed using letters of credit, which gained 47.4 percent in January from a year earlier. Saudi companies are also importing more building materials as numerous state and joint venture projects begin construction. LCs opened for building material imports, which slumped 41.3 percent in 2009, jumped 48 percent in January from the same month a year earlier. Saudi exports are also looking stronger than they were just six months ago, tracking gains in world trade, which recorded a 10.3 percent advance in fourth-quarter export compared with the third quarter, according to WTO numbers. World exports in the three-month period rose 3.9 percent year on year, against an annual drop of 25.5 percent drop in the third quarter. European and Asian exports lent the most impetus to world trade, witnessed annual gains of about 4 percent in the fourth quarter. Kingdom's non-oil exports were also robust in December, rising 15.9 percent from November to SR10.14 billion for the month, as petrochemical exports soared 43.5 percent month on month to SR3.14 billion and plastics exports jumped 17 percent to SR2.85 billion, both the biggest monthly values for 2009. The preliminary CDSI data indicate that full-year non-oil exports amounted to SR101.36 billion in 2009, down about 16 percent from a year earlier. Some 83 percent of Saudi Arabia's export revenues last year were derived from the sale of crude oil to markets abroad. Due to substantial oil output curbs, lower oil prices and a slump in global demand, Saudi oil export revenues fell almost 46 percent last year from record levels in 2008 Saudi ports loaded 84.1 million tons of cargo for export during 2009, down 3 percent from the year earlier, the decline mainly paced by lower refined products exports, which dropped 6 percent in the 12-month period. Refined products accounted for 51.5 percent of total loaded cargo at all Saudi ports last year. Petrochemicals shipped from Saudi ports, on the other hand, climbed 9.4 percent, while food and industrial products were almost unchanged, each declining 0.8 percent from the year earlier. With better prices and stronger crude oil demand prospects this year, we expect a 23 percent rise in oil exports this year to $188.5 billion, bringing it back to about 2006 levels.