Money demand holds despite fiscal deficit

JEDDAH —  Saudi Arabia’s broad money supply (M3) rose by an annualized 10.5% last June, indicating continued expansion of economic activity, the National Commercial Bank said in its “Saudi Economic and Financial Developments” views for the month of August. Despite the residual effects of Iran’s nuclear deal, and the re-plunge in the oil market, the Kingdom’s internal dynamics are still displaying signs of a positive business cycle; largely the result of adamant expansionary fiscal and monetary policies. Although the pace of annual growth has been in deceleration since the beginning of the year, low inflation and abundant fiscal buffers will continue to support the banking system with ample liquidity. By the end of the second quarter, the Kingdom drew down about $60 billion from its $732 billion reserve assets this year, covering around 42% of its budget deficit. Moreover, for the first time in eight years, the government is also expected to issue local bonds worth $30.7 billion (SR115 ) through the second half of 2015 to cover around a third of the deficit. The Kingdom is capable to withstand external shocks with its globally lowest debt/GDP ratio of 1.6% in 2014 and massive foreign reserves. The monetary base grew by 11.2% Y/Y, thus reaching SR313.3 billion. Currency outside banks was the main contributor to the upturn as it surged by 14.9% compared to the same period last year, reaching SR174.1 billion. The second largest contributor to the growth in the monetary base is deposits with SAMA which rose by 4.2% to SR107.4 billion, affected by a 48.2% plunge in deposits of public financial institutions down to SR6.6 billion. On the other hand, deposits of local banks continued to surge, reaching SR100.8 billion, marking an annualized upturn of 11.6%. Looking at the money supply, near money (M2) surged by 12.4%, supported by strong growth in its main components, narrow money (M1), and time deposits. Among the most liquid components of the money supply, M1, demand deposits dominate around 86.2%, and make up around 59.5% of the broadest measure, M3. Demand deposits soared by 15.3%, reaching SR1.08 trillion by June. It is worth-noting that about 92% of demand deposits are owned by businesses and individuals whom preference for cash and its equivalents outweighs that for low-yielding time and saving accounts. That being said, the relative moderation in economic activity last year had resulted in a lower need for cash on stand-by, mainly by government entities, leading to a record growth in time and savings of 23.2% mid-2014. Government entities deposits, which constituted over 57.5% of these deposits at the time reached record highs of SR229.4 billion by year end. Although government entities are still the growth driver for this type of deposits, they recorded the first annualized decline in June by around 5.4% to SR195.7 billion, and their share has been reduced to 52.5%. The inflationary situation in the Kingdom remains subdued at an annualized 2.2%. Renewed bouts of declining food and energy prices added a downward pressure on imported goods, while the stronger dollar subsequently increased the Saudi riyal’s purchasing power. Food prices in the Kingdom rose 2.2% Y/Y, affected by a 15.7% surge in fish and seafood prices. Housing and utilities recorded a 3.6% upturn from last year, mainly due to a rise in two of its components, rent and home renovation by 4.8% and 4.2%, respectively. We expect headline inflation to remain at remain between 2.0%- 2.5% throughout the remainder of the year. — SG