Banking sector and fiscal policy

Saudi money supply growth touched a 13-month high recently, prompting the Saudi Arabian Monetary Agency to step up the issuance of SAMA bills, in order to absorb some of the liquidity in the banking sector and reduce the potential impact on inflation.
The growth of bank deposits also remained healthy as time and saving deposits continued to benefit from the prospect of higher interest rate while heightened activity in the stock market exerted little impact on demand deposits.
These results clearly highlight the positive momentum within the Kingdom's banking sector. The continued build-up of deposits is a positive when the banks can and must play a bigger role in driving economic development. There have been structural developments to accelerate the momentum in certain areas, for example, the mortgage law.
But, in general, the banks are essential for driving private sector-led development in an economy that has historically relied very heavily on government provision and investment. One of the key development opportunities in the years ahead is to develop even more models and structures that can enable banks to drive development. This is a requirement that should not be ignored.
On the hindsight, the depository base in the Saudi financial system continued at an all-time high of SR1.5 trillion, surging by 14.5 percent compared to the same period last year.
On an annual basis, the consolidated capital of Saudi banks rose 27.5 percent, a record high, which indicates banks in the process of expanding their operations in order to achieve better market penetration. The strong capital positions also suggest that banks are bulking in anticipation for a surge in demand for loans, especially when Saudi banks are considered “well-capitalized” beyond Basel III capital requirements.
Total credit extended by banks reached SR1.2 trillion in July. Loans to the private sector, which by weight makes up over 96 percent of total loans, surged by 11.7 percent to SR1.16 trillion.
Despite the tough SAMA regulations, the suppressed interest rate environment keeps demand for lending high under the currently sound economic fundamentals. However, the looming interest rates hike by the Fed could put a dent on local lending growth as SAMA will follow suit with its contractionary monetary policy.
Thus, unrealized losses on deposits are much smaller in comparison to the United States. Despite the lower financial leverage, the conventional nature of the Saudi banking system reflects the current cycle that remains on an uptrend, supported by continued expansionary fiscal policy. Sustaining this trend is possible by continuing the pragmatic policies.
—
Email: [email protected]