Banks in Saudi Arabia were hit with a torrent of new liquidity after the government paid out about SR53 billion in bonuses to civil service employees, a figure that excludes similar payouts offered by private sector employers and banks. Many private companies doled out two-month bonuses to staff in April, following in the footsteps of their state-owned counterparts a month earlier.
Accordingly, broad money supply jumped 17.2 percent to SR1.18 trillion in April, the highest rate of growth since April 2009, and a level that if sustained would contribute to inflationary pressures in the Kingdom. M2 — which includes demand deposits, currency outside banks, and time and savings deposits-also advanced 17.8 percent, a 28-month peak. It is likely money supply growth will slow down in the coming months due to the one-off nature of the hand outs, however the implications of the massive rise in public spending power could be felt for some months in the cost of consumer goods.
Monetary base, a measure that reflects highly liquid currency in banks and held by the public, soared 26.5 percent in April. Most citizens were prone to keeping their funds in non-interest-bearing demand deposits, favored due to their accessibility and a lack of appeal of savings deposits due to low interest rates. Demand deposits climbed 33 percent year on year in April, representing 57.4 percent of total deposits, up from just 48 percent at the start of 2010. Recurrent payments prior to the summer break could compel businesses to place funds in demand deposits to keep them easily deployable. Time and savings deposits, by contrast, fell 6.8 percent in April, including a month-on-month decline of 3.8 percent. Foreign currency deposits also eased 2.6 percent month on month.
 
POS transactions jump
Private consumption has clearly picked up in the Kingdom as a result of the slew of state-funded citizen benefits. The value of point of sale (POS) transactions increased 18 percent in the month to April 30 to SR9.11 billion — a 58 percent surge compared with the year earlier, indicating consumers were willing to make big-ticket purchases.
The number of POS transactions also rose sharply by 31.8 percent year on year in April. Saudi Arabia is still a largely cash-based society. Therefore, while POS transactions provide an indication about the level of consumption, they do not reflect the totality of the impact from government bonuses on consumer purchasing patterns.
For the time being, the inflationary impact has been muted. Headline inflation rose only slightly to 4.8 percent in April from 4.7 percent in March, mainly due to a decent decline in the pace of rental inflation and some base effects. Even other categories like clothing and home furniture were mostly stable in April, while the “other expenses and services” category climbed only moderately. This could indicate many retailers are loath to increase prices as they sell excess inventory ahead of restocking during the summer, including the June wedding season. The central bank said in a quarterly inflation report it expected inflationary pressures to continue “at moderate rates” in H2.  Import trends continued to exhibit the modest pace in inventory growth. New letters of credit (LCs) taken against the import of goods rose 12 percent year on year in April, although they were down 11.4 percent from March levels, mostly owing to a drop in machinery, vehicle and food imports.
 
Private sector credit
growth slips
The block of state initiatives unveiled in the first quarter to support citizens underpinned the government’s willingness to continue to drive the economy. This enthusiasm has not yet led to an extensive improvement in the private sector’s investment appetite.
Private bank credit, excluding investments in securities, expanded 6.4 percent in April, edging lower from growth of 6.5 percent a month earlier, which had been the highest since May 2009. The pace of month on month expansion in private credit also decelerated. Credit to public sector enterprises similarly dropped 5.8 percent in the month to April 30.
With all of the new deposits, banks are well-capitalized to be able to extend new loans, although they continue to apply more stringent rules for loan extensions. Private sector businesses meanwhile are not expanding their businesses as much as they had been prior to the financial crisis. These factors have contributed to the temperate pace of improvement in the loan environment.
Most of the loans that are being granted are longer-term in tenure, indicating that project financing among larger companies, particularly those working alongside the government, is picking up. Loans maturing in three years or longer, classified as long-term, grew 15.9 percent in April, compared with 9.9 percent growth in medium-term credit (one to three years) and 0.9 percent for short-term lending (less than one year).
In an environment where lending is weak and deposit growth is strong, it is not surprising to see the loan-to-deposit ratio sag to a low 74.8 percent in April, down from 82.3 percent a year earlier. Banks are holding a lot of money abroad, their net foreign assets up 20.8 percent in April to SR121.6 billion. They are also becoming profitable as they take fewer provisions and lending, while slow, picks up relative to a year ago. Cumulative bank profits rose 6.5 percent in April, their second month of gain after almost two straight years of declining.
Net foreign assets of the central bank, meanwhile, expanded by 13.2 percent year on year to SR1.76 trillion ($468.34 billion), a record and the highest annual growth in two years. US oil prices averaged $110 a barrel in April, up more than a fifth since the end of last year. Brent crude surpassed $120 a barrel.
Foreign security investments took precedence, rising 11 percent to SR1.27 trillion, while SAMA deposits with banks abroad slipped 1.8 percent compared with the month earlier, likely due to the government’s need to draw on funds to finance a hefty budget. The pace of foreign asset growth is likely to slow in the coming months as oil prices stabilize at lower levels and the bill to finance Saudi Arabia’s SR485 billion spending program accumulates.
 
— John Sfakianakis is chief economist at Banque Saudi Fransi, Riyadh.