Jeddah - Arabstoday
Saudi market interest rates have edged up during the course of the year, though rates are still low by historical terms and liquidity remains plentiful. Quarterly data show strong growth in mortgage lending, though flows to construction have leveled off. The domestic project market is buoyant, but the deteriorating external environment has meant weak export orders for some Saudi firms. Inflationary pressures have moderated and the recent rise in wheat and corn prices is unlikely to have much of an impact, according to a report by Samba Financial Group. The Saudi interbank market remains relatively placid. There has been an uptick in SAIBOR this year, which increased to 0.96 percent in mid-September, from 0.78 at end-2011, and the spread with USD LIBOR has also widened. However, both the spread and the absolute level are comfortably lower than during the 2008-09 financial crisis. Meanwhile, yields on three-month treasury bills have also crept up, rising to 0.37 percent at end-July (latest data) from 0.28 percent at end-2011. In essence, the uptick in rates reflects the fact that lending growth is outstripping the increase in deposits: Commercial bank lending to the private sector is currently running at around 13 percent, year on year, while deposit growth is around 10 percent. This has put some upward pressure on SAIBOR, and on treasury bill yields, which need to be slightly more competitively priced in order to attract enough bids. There may also be something of a political premium priced in to rates given persistent tensions in the MENA region, the Samba report said. LIQUIDITY Although deposit growth has lagged lending, the average loan-deposit ratio of 84 points to extremely comfortable levels of liquidity. Moreover, the increase in lending activity is commensurate with a buoyant domestic economy, and is in sharp contrast to the euro zone, for example, where efforts to improve interbank liquidity have failed to conjure up increased lending to the private sector. With price pressures subdued there is plenty of scope for a further sustained increase in bank credit. As for T-bill yields, the authorities are issuing these for monetary management purposes only, and the increase in yields is no reflection on the government\'s financial health: Indeed, the stock of outstanding T-bills has declined by almost a quarter over the past year, while public sector deposits with the banking system increased by a third. Beyond this, according to the Samba report, the spread on one-year forward rates - which might be a more accurate barometer of confidence in the economy than SAIBOR - is near parity. MORTGAGE LENDING Quarterly data from SAMA (Saudi Arabian Monetary Agency) shed some light on which sectors have benefited from bank lending. The three largest sectors remain, respectively, commerce, manufacturing, and building & construction, which account for a combined 40 percent of total lending. Trends during the first half of 2012 were unremarkable, though over the past two years commerce\'s share of total lending has declined by 3 percentage points, while manufacturing has increased its share by a similar amount. This trend reflects increasing flows to long-term project financing for large refining and petrochemicals projects, which are often underwritten by the state, and which tend to benefit from cheap feedstock. As for the smaller segments of bank lending, real estate finance has continued to show strong growth. Indeed, in the second quarter of this year flows to this sector grew by over 50 percent to SR 48 billion. The long-awaited mortgage law was approved after the second quarter so the reasons for the surge are not obvious, though it may be that banks had an early indication that passage of the law was imminent. Market sources indicate that banks are now eager to grow their mortgage loan books and are unlikely to wait to \"road test\" the law. That aside, there is no indication from the SAMA data that construction of residential real estate has picked up significantly. Lending to building & construction showed a sharp pickup in the final quarter of last year, but has since leveled off. Still, the Ministry of Housing has invited bids from contractors to build 7,000 homes in Riyadh as part of the plan to construct 500,000 homes over the next few years - a modest start perhaps, but a sign that the fledgling ministry is getting into gear. Elsewhere, the $9 billion Al-Shamiyah urban regeneration project in Makkah, which aims to provide housing for 134,000, is also being revived. INFLATION According to the Samba report, August inflation reading was just 3.8 percent, down from a recent peak of 5.4 percent in February, and the lowest since October 2009. Inflation moderated across all major categories, which suggests an exchange rate impact. The recent run-up in the global prices of wheat and barley does not appear to have had much bearing on Saudi inflation. On balance, Samba has decided to reduce its inflation forecast to 4.5 percent for this year, which largely reflects the unexpectedly low reading in September. For 2013 it expects average inflation of 5.1 percent. From : Arabnews