Saudi Arabia’s headline inflation is likely to remain at remain between 2.0 per cent to 2.5 per cent during the rest of the year, according to a new report from NCB, the largest bank by asset in the Arab world.

Broad money supply (M3) rose by an annualized 10.5 per cent in June, indicating continued expansion of economic activity, said NCB’s Saudi Economic Review for August 2015.

“Despite the residual effects of Iran’s nuclear deal, and the re-plunge in the oil market, Saudi Arabia’s internal dynamics are still displaying signs of a positive business cycle — largely the result of adamant expansionary fiscal and monetary policies,” the NCB report said.

Although the pace of annual growth has been in deceleration since the beginning of the year, low inflation and abundant fiscal buffers will continue to support the banking system with ample liquidity.

By the end of the second quarter, Saudi Arabia drew down about $60 billion from its $732 billion reserve assets this year, covering around 42 per cent of its budget deficit.

Moreover, for the first time in eight years, the government is also expected to issue local bonds worth SR115 billion ($30.7 billion) through the second half of 2015 to cover around a third of the deficit.

Saudi Arabia is capable to withstand external shocks with its globally lowest debt/GDP ratio of 1.6 per cent in 2014 and massive foreign reserves.

The monetary base grew by 11.2 per cent Y/Y, thus reaching SR313.3 billion. Currency outside banks was the main contributor to the upturn as it surged by 14.9 per cent com-pared to the same period last year, reaching SR174.1 billion. The second largest contributor to the growth in the monetary base is deposits with Saudi Arabian Monetary Agency which rose by 4.2 per cent to SR107.4 billion, affected by a 48.2 per cent plunge in deposits of public financial institutions down to SR6.6 billion.

On the other hand, deposits of local banks continued to surge, reaching SR100.8 billion, marking an annualized upturn of 11.6 per cent.

Looking at the money supply, near money (M2) surged by 12.4 per cent, supported by strong growth in its main components, narrow money (M1), and time deposits.

Among the most liquid components of the money supply, M1, demand deposits dominate around 86.2 per cent, and make up around 59.5 per cent of the broadest measure, M3.

Demand deposits soared by 15.3 per cent, reaching SR1.08 trillion by June.

It is worth noting that about 92 per cent of demand deposits are owned by businesses and individuals whom preference for cash and its equivalents outweighs that for low-yielding time and saving accounts. That being said, the relative moderation in economic activity last year had resulted in a lower need for cash on stand-by, mainly by government entities, leading to a record growth in time and savings of 23.2 per cent mid-2014.

Government entities deposits, which constituted over 57.5 per cent of these deposits at the time reached record highs of SR229.4 billion by year-end.

Although government entities are still the growth driver for this type of deposits, they recorded the first annualized decline in June by around 5.4 per cent to SR195.7 billion, and their share has been reduced to 52.5 per cent.

NCB economists said that renewed bouts of declining food and energy prices added a downward pressure on imported goods, while the stronger dollar subsequently increased the Saudi riyal’s purchasing power.

Food prices in the Kingdom rose 2.2 per cent year-on-year, affected by a 15.7 per cent surge in fish and seafood prices. Housing and utilities recorded a 3.6 per cent upturn from last year, mainly due to a rise in two of its components, rent and home renovation by 4.8 per cent and 4.2 per cent, respectively. - TradeArabia News Service