Kingdom's Money Supply Rebounded

by shariff mohammed | Mar 02, 2017

The Saudi Arabian Monetary Authority (SAMA) has passed several measures to enhance liquidity in the domestic financial system, which has contributed to lowering the cost of funding. Growth in money supply has rebounded in recent months, benefiting from higher deposits as a result of a resumption of government payments to the private sector.

Following the international sovereign bond program, in October 2016, domestic banks have seen a modest rise in their claims over the public sector. Sentiment will play an increasingly significant role in determining growth in private sector credit during 2017, particularly following tightening liquidity that persisted before October.

Within the private sector in Q3 2016, net credit was higher, year-on-year towards commerce and agriculture. Financial Soundness: The financial system is still liquid and can provide room to finance both the public and private sectors, but with sentiment playing a key role. The surge in net capital outflows that pushed down FX reserves at the beginning of 2016 moderated in Q2 and Q3 2016, mainly due to an improvement in both the current account and the non-reserve financial account.

Global Monetary Outlook

The sharp rise in US Treasury yields following the elections reflects heightened expectations of an expansionary fiscal stance in the US. This development, along with an uptick in inflation, and an already strengthening labor market, resulted in the Fed raising the Federal Funds Rate (FFR) in mid-December 2016 by 25 basis points (bps), its second such hike since 2008. We see recently released economic data, including US unemployment rate falling to pre-2008 levels, pushing the Fed to continue with its gradual tightening cycle. The potential for a faster pace of rate hikes is positive if fiscal policy brings more stimulus in 2017. Latest survey data shows a 57.3 percent probability of at least two additional US interest rate hikes, by 25bps each during 2017.

That said, risks linked to excessive monetary tightening could push up borrowing costs for corporates in the US, especially those engaged in borrowing heavily from the high-yield debt market. Particularly vulnerable is the US high-yield energy sector where outstanding debt has grown from $80 billion in 2009 to around $260 billion in Q2 2016, the majority of which is held within the shale oil industry.

Under these circumstances, many emerging markets are running the risk of also having to raise interest rates in order to maintain a strong currency, and limit the impact of potential currency crises. Countries with high US Dollar denominated debt such as Turkey and South Africa stand out. Higher US interest rates could also have negative effects on global financial markets, similar to what happened at the beginning of 2016 when the FFR hike, coupled with fears of an economic slowdown in China, led to turmoil in global equity markets. In November, net portfolio flows to emerging markets have shown their third largest outflow since the global financial crisis; possibly due to the anticipated FFR hike, but it may also reflect rising concerns over the outcome of US elections.

Saudi monetary and financial outlook

In December 14, 2016, the Saudi Arabian Monetary Authority (SAMA) increased its reverse repo policy rate by 25bps to 0.75 percent, its second such increase since 2008, mirroring the hikes in the US. Meanwhile, SAMA’s key policy repo rate was kept unchanged at 2.0 percent. SAMA’s rate increase and the prospect of further Fed hikes in 2017 will not have a significant impact on the domestic liquidity situation. This is specifically due to SAMA recently passing several measures to enhance liquidity in the domestic financial system. In September, SAMA introduced new 90-day repos, as well as capped the weekly issuance of SAMA bills to SR3 billion, down from SR9 billion previously. SAMA has also recently approved changes to calculate the Saudi Interbank Offer Rate (SAIBOR) more appropriately. These changes, along with the international bond issuance, and the resumption of payments by government to contractors, as per an official announcement made in October, have contributed to halting the rise in the cost of funding. The SAIBOR has started to decline, and annual growth in deposits and broad money supply turned positive in October for the first time in 2016.

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