The Saudi Central Bank (SAMA) has released figures indicating that the country’s money supply reached SR2.95 trillion ($785.51 billion) in November, marking a 10.3 percent increase compared to the same period last year.
Highest Percentage Share of Money Supply in Over 15 Years
According to SAMA data, time and savings deposits have recorded their highest percentage share of the money supply in over 15 years, accounting for 33.61 percent or SR989.99 billion. These deposits have also registered the fastest growth rate among all components of the money supply, increasing by 18.10 percent.
Demand Deposits Account for Largest Share
Demand deposits, which accounted for the largest share at 48.76 percent, experienced a slight decline from their 50 percent share a year earlier. However, they still grew by 7.69 percent during this period.
Remaining Components Collectively Made Up 17.63 Percent of Total Money Supply
The remaining components collectively made up 17.63 percent of the total money supply, indicating a more stable and diversified financial landscape in Saudi Arabia.
Edmond Christou’s Insights on Saudi Banking Sector
In an interview with Arab News, Edmond Christou, senior industry analyst at Bloomberg Intelligence, offered his insights on the current state of the Saudi banking sector. According to him:
"The surge in term deposits is driven by tighter liquidity conditions and elevated interest rates. Local lenders’ role in financing projects requires more cash, underpinning the likes of Saudi Fransi, ANB, Rajhi, and SNB issuing euro-denominated medium-term notes."
Term Deposits: A Strategic Measure to Navigate Strong Loan Demand
Christou further explained that term deposits provide a more predictable funding source compared to demand accounts, which can fluctuate significantly. The strategic shift helps banks align their funding structure with long-term lending requirements, particularly for infrastructure and construction projects.
Higher Saibor Spread Boosts Funding
The elevated 115-basis point spread between the Saudi Interbank Offered Rate (Saibor) and the US Secured Overnight Financing Rate (SOFR) illustrates the tight liquidity landscape in Saudi Arabia. According to Christou, this higher Saibor compared to SOFR means that borrowing and funding costs in Saudi Arabia are relatively higher than those in the US.
External Borrowing: A Bridge for Funding Gaps
To address their funding needs, banks have turned to external borrowing, including issuing euro-denominated bonds. Local lenders like Al Rajhi Bank, Saudi National Bank, and Banque Saudi Fransi have leveraged such instruments to support their liquidity requirements.
Loan-to-Deposit Ratio Below Regulatory Limit
The loan-to-deposit ratio in Saudi banks has remained steady at 82.16 percent in November, despite the fact that loans grew by over 13 percent annually, outpacing deposits growth over the same period. The stability of this ratio is likely due to support from other sources of funding, such as debt issuance and private placements.
International Monetary Fund’s Assessment of Saudi Banking Sector
According to a June report by the International Monetary Fund (IMF), the Saudi banking sector is resilient, with stress tests indicating that both banks and non-financial businesses can withstand shocks even in challenging scenarios. However, close attention is needed to balance credit growth, funding, and systemic risks, especially as large-scale government projects under Vision 2030 accelerate.
Potential Risks and Policy Adjustments
While banks are well-capitalized, profitable, and maintain high liquidity with low nonperforming loans, there are potential risks tied to fast credit growth and the increasing reliance on non-deposit funding sources. To manage these risks, SAMA may need to adjust its policies, such as revisiting loan-to-value limits, debt burden guidelines, and loan-to-deposit ratios.
Conclusion
The Saudi banking sector has shown resilience in recent years, with a steady increase in money supply and stable loan-to-deposit ratio. However, potential risks tied to fast credit growth and non-deposit funding sources require close attention from policymakers. By revisiting policies and implementing enhanced tools, such as countercyclical capital buffers, the sector can better prepare for future challenges.
Recommendations
- Enhanced monitoring: Better tracking of house prices and bank exposures to large projects would provide a clearer picture of risks.
- Policy adjustments: SAMA may need to adjust its policies, such as revisiting loan-to-value limits, debt burden guidelines, and loan-to-deposit ratios.
- Countercyclical capital buffer: Implementing this tool can help prepare for future challenges.
By addressing these potential risks and implementing enhanced tools, the Saudi banking sector can maintain its stability and support the country’s economic growth.
