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Liquidity in Saudi Arabia is Boosted by Employee Bonus

Saudi Arabia : 31 May 2011

Foreign assets continue to surge as the increase fails to drive slowing bank lending.

A bonus equal to two months of salary that was distributed to both private and public employees on the orders of King Abdullah and included in a massive financial allowance helped to create a boost in liquidity across the Kingdom while still failing to improve bank lending.

The supply of money in the leading global oil superpower climbed to a two-year high in April as indications emerged that the generous handouts from the government and industries in 2011 were improving consumer confidence, based on a study sent to Emirate 24/7 covering the Kingdom.

Rising oil prices, shooting over $100 in the recent past due to unrest around the region, have resulted in new records for foreign assets.

However these positive indications did not lead to higher growth in private sector bank lending. This figure slowed down as a result of heightened focuses on developments led by the government, based on the study written by John Sfakianakis, chief economist at Banque Saudi Fransi.

The BSF study stated that the twelve commercial banks in the Kingdom experienced a surge of renewed liquidity as a result of the bonuses the government paid out, around SR 53 bn to civil servants. This amount does not include the similar payouts given to banks and employees in the private sector.

In April many private businesses handed out bonuses of two month’s salary to their employees, imitating the moves of the state only one month before, stated the BSF.

The broad money supply surged by 17.2 percent to hit SR 1.18 trillion this past April. This is the highest growth rate seen since April of 2009, according to the BSF. The bank stated that if this level is sustained, it will result in inflation throughout Saudi Arabia.

M2, including currency outside of the banks, both savings and time deposits, as well as demand deposits, surged to a 28-month high, swelling by 17.8 percent.

The study forecasted that the growth of money supply will slacken in the months to come as a result of these hand outs being a one-time deal. However the implications that this huge increase in public spending power may create a lasting effect in consumer goods costs for months.

The monetary base, or the measure reflecting high levels of liquid currency in the public arena and the banks, experienced a 26.5 percent increase this April, according to the report.

Most of the citizens tended to keep their money in demand deposits that were non-interest bearing. These are more accessible and more appealing than savings deposits as a result of the low interest rates being offered, said the study.

On a year-on-year basis, demand deposits increased by 33 percent in April. This figure now accounts for 57.4 percent of the total deposits, a significant increase from the 48 percent portion it held at the beginning of 2010.

Recurring payments that occurred before summer break may encourage companies to put their funds in demand deposits, allowing them to be easily deployed, according to the study.

The collection of initiatives put forth by the state in the opening quarter in order to support the citizens has fortified that government’s drive to pursue economic growth.

According to this study, these movements have not resulted in significant improvement through the investment appetite of private industry.

Credit in private banks, not including security investments, grew by 6.4 percent in April. This was just short of the 6.5 percent growth experienced one month earlier, the highest figure recorded since May of 2009, based on these figures.

Month-on-month growth in private credit has also slowed down.

Credit available to the public sector also decreased by 5.8 percent in April. Due to the amount of new deposits the banks have plenty of capital available for new loans, even though they are maintaining stricter rules of approval for these loan extensions. Businesses within the private sector are not pushing for expansion at the rate they were before the financial crisis hit.

BSF noted that the moderate rate of improvement seen in the loan climate has partially been due to these factors.

The study noted that many loans being issued are long term, which indicates an increase in the project financing within larger firms who are likely working with the state.

Loans that will mature in three years or more, categorized long term, increased by 15.9 percent in April. This was much higher than those considered medium term (between one and three years) which grew by 9.9 percent and those considered short term (less than 12 months) which saw only 0.9 percent growth.

The BSF stated that it is not surprising to see a low loan-to-deposit ratio in a climate with weak lending and strong deposit growth. In April 2011 this ratio was 74.8 percent, compared to a ratio of 82.3 percent seen in 2010.

Banks are leaving their funds abroad, as net foreign assets grew by 20.8 percent this April, reaching SR 121.6 bn. Banks that are taking fewer provisions are also seeing more profits and although lending is slower, as it has picked up the banking profits increased by 6.5 percent in April. This is the second month of increases after nearly two years of consecutive declines.

Paul Holdsworth, Staff Writer, Gulf Jobs Market News
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