Saudi Arabia Economic Update
The loan market in Saudi Arabia continues to grow driven by a favorable business cycle sound credit worthiness and high liquidity. Despite plunging oil prices and geopolitical turmoil in many of the Middle East and North Africa (MENA) region countries the investment prospect is growing strong marking a 17.4 percent Y/Y upturn in the second quarter 2014 the highest since Q2 2012 according to the National Commercial Bank.
The lower benchmark risk and interest rate environment significantly lowers borrowing costs increasing its attractiveness for businesses and individuals who make up over 60 percent of the Saudi credit market. In November the annual growth in private sector credit rose by 12.6 percent around the year’s average reaching SR1.2 trillion. This brings total fresh credit extended to the private sector up until November to SR132.5 billion. Excluding treasuries and bonds the public sector credit climbed by 12.6 percent up to SR319.9 billion. On the other hand Saudi Arabian Monetary Fund’s (SAMA’s) treasury bills and the Saudi government bonds grew by 32.7 percent Y/Y and 11 percent Y/Y respectively totaling SR277 billion. SAMA’s open market operations act as a liquidity management tool ensuring price stability as inflation stood at 2.5 percent in November the NCB report said.
On the liability side high liquidity manifested in growth of deposits facilitates local banks’ willingness to lend as deposits surged by an average of 12.9 percent in the last 12 months in November to SR1.5 trillion. Demand deposits still retain the lion’s share in the composition of deposit accounts by almost 62 percent of total deposits amounting to SR955.2 billion. However the rapid acceleration in time and savings deposits which annually surged by a 18.7 percent contributed to primarily by government entities allowed local banks to find niche opportunities in longer maturity loans. As it stands over 50 percent of the SR1.25 trillion cumulative bank loans are with medium and long-term maturities. Medium-term loans make up 17.9 percent while long-term loans account for 32.4 percent of total bank loans. The double-digit acceleration in loans of longer tenors is predicated by the premise that a moderation in infrastructure capex will leave some short-run liquidity unutilized. Nevertheless the loans-to-deposit ratio (L/D) in November was 81.2 percent indicating a healthy level of capacity utilization.
Although recurrent US jobs market data have become largely positive the low inflation specter and worries about persistent global qualms continue to keep the interest rate landscape unchanged. The peg with the US dollar will typically form a positive correlation between the SAIBOR and LIBOR. Eventually rising interest rates in the US will prompt SAIBOR to rise accordingly keeping interest rate differentials between the SR and USD deposits at comparable levels of around 70 basis points.
‘In November SAIBOR inched downwards by 3 basis points to 0.89 as interbank lending moderates towards year end. Moving further into 2015 we expect to see benchmark interest rates moving up by 25 basis points as the Fed decides to normalize its monetary policy’ the NCB said in its report.
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