Given the elevated level of oil prices during the first half of 2014, Saudi Arabia is set to record another fiscal surplus, the National Commercial Bank further said in its latest Saudi Economic Review released Sunday.
The influx of revenues is reflected by the strong monetary status as M0, the monetary base, increased by 9.2 percent during June on an annual basis, rising to SR324 billion. Currency outside banks picked up by 9.1 percent Y/Y during June as Ramadan started mid-way during the month. The main bulk of M0 resides in bank reserves which are mostly deposits with SAMA, they rose by 7.6 percent Y/Y.
Meanwhile, cash in vault grew by 20.1 percent annually to bring total bank reserves to SR172.5 billion by the end of August. M0’s level is 8.8 percent below its peak in January, evidence of the prudent strategy adopted by SAMA to limit liquidity risks. Additionally, banks’ excess reserves ratio which is represented by deposits with SAMA other than statutory deposits dropped to 38.5 percent as banks opt to utilize their assets given the healthy state of the credit market. SAMA’s treasury bills recorded an annual increase of 30.7 percent to contain inflationary risks of excess liquidity in the market.
The broadest measure of money supply (M3) has maintained a strong positive trajectory for the past few years as it posted a 5-year compound annual growth rate of 10.5 percent by the end of June. The current annual rate is marginally higher at 12.3 percent Y/Y, risks of overheating are still benign and the pace is sustainable given the robust status of the overall economy.
The main driver of M3 was demand deposits which gained 14.1 percent Y/Y in June. Since the beginning of the year, the non-yielding deposit base added SR81.8 billion as investors opt to park their assets in a readily accessible form.
Additionally, time and saving deposits have been outpaced once more due to the suppressed interest rate environment as they only expanded by 12.8 percent Y/Y. As the US tapers their quantitative easing program and raise interest rates in the future, we expect time and savings deposits will attract more funds going into 2015. In addition, other quasi-monetary deposits accelerated by only 6.1 percent annually with a share of 11.9 percent of M3 by the end of 2014’s first half. Consumer prices have been range-bound as the benchmark inflation rate recorded a rise of 2.7 percent in local prices. Inflation has been contained through proactive policies which subdued inflationary pressures. The largest category by weight, food and beverages, rose by 2.8 percent on an annual basis, the slowest pace in almost four years. Imported inflation majorly influences local prices as Saudi is import-oriented with regards to consumable goods.
The US dollar has been improving against other major currencies and we expect the category to slow further. Real estate prices remain a bottleneck as the youth population seek to own their assets. The housing and utilities category accelerated at a rate of 4.1 percent Y/Y, slightly above the first half average. The inflation rate is expected to remain subdued despite the sustainable growth of credit and the liquid state of the economy. We do not foresee inflationary risks arising during this year as the underlying factors remain favorable domestically.