JEDDAH – The Saudi annual rate of inflation will average around 4.8 percent this year, even though July's drop had been unexpected, the National Commercial Bank said in its September 2012 “Saudi Economic Review”. The report noted that the liquid state of the economy suggests that prices should remain somewhat contained without raising concerns for policy makers. Other subcategories also posted declines, food and beverages decelerated to 4.0 percent from 4.7 percent during the previous month. However, global food prices have rebounded which will support the current level of the inflation rate. Additionally, the category of renovation, rent, fuel and water posted an annual rate of 8.3 percent, the slowest rate this year. The relatively slow growth of broad money has supported the drop in local prices, the report added. During July, the inflation rate decelerated to the slowest pace in three years at an annual 4 percent. This was attributed by the significant slowdown in the other expenses and services category which posted a 1.8 percent increase during July while June's figure was 5.1 percent Y/Y. The deceleration is largely due to base effects as the aforementioned category accelerated rapidly towards the second half of 2011 bringing the year's average to 8.9 percent, which “could also contribute to a further downfall in the inflation rate over the coming few months.” Moreover, although broad money (M3) edged slightly lower than the all-time high recorded in June, M3 posted an annual growth of 9.5 percent during July. Representing the largest share of broad money, demand deposits expanded by 13.3 percent Y/Y. The lack of attractive yields continues to persuade investors away from time and saving deposits. The option to have quick access to liquidity in order to grasp investment opportunities will hold back the appetite for the currently low interest rate products. Time and saving deposits decelerated to an annual growth of 2.5 percent during July as oppose to June's 3.6 percent rise. Additionally, other quasi-monetary deposits have recorded the fastest pace since May 2011 as it rose by 7.9 percent on an annual basis during July. The composition of M3 is still dominated by demand deposits with 54.0 percent, followed by time and savings deposits with 22.9 percent, and other quasi-monetary deposits and currency outside banks represent 13.1 percent and 10.0 percent, respectively for July. The report further said the sustainable level of growth in the monetary system is in line with the fiscal expansionary policy while the extent of inflationary pressures remains subdued. The monetary base (M0) rose by 8.5 percent during the month of July, the fastest pace in the last five months. On a monthly basis, M0 expanded by SR10.2 billion as deposits with SAMA grew by 6.3 percent M/M. Besides, local banks increased their cash in vault levels to reach SR20.7 billion to accommodate the spending spree of Ramadan season. The trend was also witnessed in currency outside banks with a rise of SR2.0 billion over June. NCB report stressed that deposits in the Saudi financial system are more than adequate to accommodate the rising credit market and its potential. Although on monthly basis total deposits marginally contracted by SR6.6 billion, or 0.6 percent, they have risen by over SR100 billion over the twelve months trailing through July, an annual growth of 9.6 percent. The majority was contributed by demand deposits from businesses and individuals, adding SR70.7 billion, while the government supplied SR10.7 billion on an annual basis. However for time and savings deposits, businesses and individuals withdrew SR3.7 billion, only to be offset by the government's injection of SR10.8 billion by the end of July. The decelerating rate of total deposits, compared to last year, which currently stands at SR1.2 trillion has pushed the loans-to-deposits ratio up to 82.4 percent, the highest since August 2010. Moreover, the report note that the Saudi banks continued to expand their lending portfolios, recording the highest growth rate over the past 41 months at 15.5 percent Y/Y during July. The aggregate claims on private and public sectors reached SR951.2 billion and we expect crossing the SR1 trillion mark is only a couple of months away. Since the beginning of 2012, banks have granted SR94.6 billion in fresh lending, indicative of the risk taking approach witnessed by banks this year. The bulk of fresh lending resided, as expected, in short term credit which added SR66.2 billion YTD. Meanwhile, medium-term credit contributed a further SR30.4 billion as SMEs became an attractive segment. However, long-term credit contracted over the past 7 months by SR2.1 billion due to the limited exposure of the financial system to mega project financing albeit recording the fourth monthly increase. Since the beginning of 2010, credit to the private sector started its rebound and has continued to accelerate through this year, recording a significant 14.1 percent in July. For the first half of 2012, commercial loans represented 67.8 percent of banks' total performing loans while consumer loans held 28.4 percent. Furthermore, the level of nonperforming loans had dropped by SR1.8 billion, or 8 percent on annual basis by the end of the first six months. Local banks have managed to “clean up” their portfolios from the damaging effects of the global financial crisis and the family conglomerates mishaps. However, provision levels have edged higher by 2.8 percent Y/Y, adding SR763.8 million to their safety cushion. We do not foresee further implication in the local credit market and the buoyant economy should facilitate business expansions for further growth. As for the interbank rate, Saibor, the subdued interest will aid banks in avoiding any liquidity shortages by allowing to access funds cheaply. It is worth mentioning that the differential between Saibor and Libor has been widening for almost a year, however, the pace is far away from worrying as SAMA is closely monitoring risk indicators for the Saudi financial system. Banks have been somewhat shielded from external shocks and will continue to grow steadily. The risk averseness approach has been widely dissolving, thus providing more opportunities for banks to grasp. In the month of June, Saudi non-oil exports showed a retraction of 2.3 percent in comparison to the previous month and a moderate 7.7 percent decline over the last 12-month period in value terms edging down to SR14.5 billion. Volume- wise, non-oil exports debilitated by 5.7 percent monthly, and 11.1 percent on an annual basis. Ranking first in export categories is Petrochemicals, which captures 36.7 percent of all non-oil exports, at the value of SR5.3 billion withdrawing 3.7 percent from the prior month?s total; whereas, on a Y/Y basis it still managed to register a 1.5 percent gain. Plastics, which lands second in value terms with its procurement of 29.8 percent of the kingdom?s non-oil exports revenue made a 2.9 percent M/M contraction, while expanding by 11 percent Y/Y. Foodstuffs exports fell by 5.5 percent since May, however; it remained stagnant at an annual level. Exports by direction show a rise of 3.7 percent M/M and a 5.5 percent Y/Y in outflows to China, the biggest recipient of Saudi exports amounting to 12.9 percent of the total. Followed by Singapore, which has as much as 10.2 percent of Saudi exports apportioned to it grew by 35.8 percent since last month, a 92.8 percent surge over the same period last year. On the other hand, exports to UAE which account for 9.3 percent of the Kingdom's exports dropped 5.5 percent downwards M/M, posing a 19 percent decrease Y/Y. – SG
