Saudi Arabian Monetary Agency Research and Statistics Department
Economic Developments
First Quarter of 2004
July 2004
First Quarter of 2004 ---
Latest monetary, banking and financial data of SAMA’s Quarterly Statistical Bulletin enhanced the outlook for continued growth of the Saudi economy during the first quarter of 2004. Money supply and bank deposits increased; interest rates declined; bank claims on the government and private sectors grew; the stock market performed well; stability of the Riyal’s exchange rate and domestic prices continued to be maintained; oil prices in world markets improved. Some economic and banking regulatory and legislative decisions and circulars, aimed at invigorating the banking business and boosting the growth of the domestic economy, were also issued during the quarter.
First: Monetary Developments
Broad money (M3) rose by 4.3 percent (Rls 17.6 billion) to Rls 429.4 billion during the first quarter of 2004 compared to an increase of 2.4 percent (Rls 9.2 billion) during the same quarter of the preceding year. The improvement in money supply growth was attributable to some factors such as a rise in government domestic expenditure and growth of bank claims on the private sector.
The rise in M3 was largely accounted for by bank deposits, with a share of 92.9 percent in M3, while the share of currency outside banks was 7.1 percent. An analysis of developments in money supplies (M1) and (M2) indicates that M1 rose by 7.1 percent (Rls 15.8 billion) to Rls 238.9 billion compared to a rise of 4.8 percent (Rls 9.9 billion) during the same quarter of the preceding year. Thus, the increase in M1 constituted 89.9 percent of the total increase in M3. The rise in M1 was due to several reasons including increased economic activity, resulting in a rise in demand deposits and currency outside banks. M1 represented 55.6 percent of aggregate money supply (M3) at the end of March 2004 compared to 54.4 percent at the end of the same month in the preceding year. M2 rose by 4.2 percent (Rls 14.0 billion) to Rls 350.4 billion, or 81.6 percent of aggregate money supply (M3), compared to a growth of 2.8 percent (Rls 8.6 billion) during the same quarter of the preceding year. The decline in M2 from M1 was caused by a decrease of 1.6
percent (Rls 1.8 billion) in time and savings riyal deposits as a result of lower rates of interest on time and savings deposits. The three-month Riyal deposit rate averaged 1.26 percent during the first quarter of 2004, declining by 6 points from its level during the same period of the preceding year.
Second: Monetary Policy
In response to world and domestic economic developments, SAMA reduced its official Repo rate and reverse Repo rate (ORR and RRR) by 25 basis points to 1.5 percent and 1.0 percent respectively. The average value of repo agreements (Repo) per day stood at Rls 2,034 million during the period, while that of reverse repo agreements (Reverse repo) was Rls 4,857 million during the same period.
SAMA did not conduct any Fx swap operations with banks during this period.
Interest rate continued to decline during the first quarter of 2004 due to improved liquidity position of commercial banks and a fall in US dollar deposits interest rates. The reduction of the official return rate on Repo agreements had a fovourable effect as the differential between the Riyal and the Dollar interest rates on the three-month deposits fell in favour of the Riyal to 11 basis points at the end of March .
As for the public debt, SAMA, on behalf of the Ministry of Finance, offered during the first quarter of 2004 two issues of government development bonds (GDB) and three issues of floating rate bonds, in addition to treasury bills issued weekly.
In March 2004, SAMA started to float GDB for domestic banks by auction to ensure effective pricing of these bonds to be in accordance with the market depth and required finance. In this auction, banks apply for bonds offered at different volumes and prices, and SAMA selects the cut-off yield of orders made by banks to be at the lowest possible cost depending on the need for borrowing.
Third: Developments in Commercial Banks’ Activity
According to data on the consolidated financial Position of Commercial Banks at the end of the first quarter of 2004, commercial banks recorded a remarkable improvement in their performance. Total assets of commercial banks rose by 6.2 percent (Rls 33.9 billion) at the end of the first quarter of 2004 to Rls 579.1 billion compared to an increase of 2.8 percent (Rls 14.4 billion) during the same period of the preceding year.
3.1 Bank deposits
Total bank deposits went up by 4.6 percent (Rls 16.4 billion) to Rls 372.7 billion during the first quarter of 2004 compared to a smaller increase of 1.8 percent (Rls 6.0 billion) during the first quarter of 2003. The ratio of total deposits to the total consolidated financial position of commercial banks stood at 64.4 percent at the end of March 2004 compared to 60.0 percent at the end of March 2003.
A classification of deposits by sector indicates enhanced expectations of the growth of the domestic private sector. Deposits of the private sector grew by 5.2 percent (Rls 15.6 billion) during the quarter under study compared to a lower growth of 0.8 percent (Rls 2.2 billion) during the same period of the preceding year.
Deposits of the public sector also rose by 1.3 percent (Rls 0.8 billion) compared to an increase of 7.3 percent (Rls 3.8 billion) is the first quarter of 2003.
Distribution of bank deposits by type shows that demand deposits increased by 8.7 percent (Rls 14.6 billion) compared to a rise of 4.4 percent (Rls 6.6 billion) during the first quarter of 2003. Time and savings deposits declined by 1.6 percent (Rls 1.8 billion) compared to a fall of 1.1 percent (Rls 1.2 billion) during the first quarter of the preceding year. Other quasi-monetary deposits rose by 4.8 percent (Rls 3.6 billion) compared to an increase of 0.9 percent (Rls 0.6 billion) in the first quarter of 2003.
A breakdown of deposits by currency indicates that the bulk of increase in deposits was accounted for by domestic currency depostis, which increased by 5.1 percent (Rls 15.0 billion) compared to a lower rise of 1.8 percent (Rls 4.9 billion)
during the same period of the preceding year. Foreign currency deposits also went up by 2.2 percent (Rls 1.4 billion) compared to a growth of 1.8 percent (Rls 1.1 billion) during the first quarter of 2003.
3.2 Credit and Investment Activity of Banks
In the area of commercial banks’ credit and investment activity in the public and private sectors, total bank claims on both sectors rose during the first quarter of 2004 by 5.3 percent (Rls 21.6 billion) to Rls 427.1 billion compared to an increase of 4.1 percent (Rls 14.4 billion) in the corresponding quarter of the preceding year.
Such expanded activity of banks suggests that the Saudi economy continued to grow at good rates during the period. These claims constituted 114.6 percent of total deposits at the end of March 2004 compared to 111.0 percent at the end of March 2003.
Developments by sectors indicate that total bank claims on the private sector went up by 5.6 percent (Rls 12.8 billion) against a decline of 2.0 percent (Rls 4.2 billion) during the same period of the preceding year, constituting 64.7 percent of total deposits at the end of March 2004 compared to 60.3 percent at the end of March 2003. Total bank claims on the public sector (loans to public institutions and investments in government securities) also rose by 5.0 percent (Rls 8.8 billion) compared to a growth of 12.4 percent (Rls 18.7 billion) during the same period of the preceding year. Thus, they represented 49.7 percent of total deposits at the end of March 2004 compared to 50.6 percent at the end of March 2003.
A review of bank credit according to maturity shows that short-term credit (less than one year) rose by 5.0 percent (Rls 7.3 billion) compared to a rise of 6.2 percent (Rls 7.7 billion) during the same period of the preceding year. Medium-term credit (one to three years) went up by 3.4 percent (Rls 1.4 billion) compared to a rise of 1.5 percent (Rls 0.5 billion) in the same period of the preceding year. Long- term Credit (for more than three years) increased by 5.9 percent (Rls 3.7 billion) compared to an increase of 1.1 percent (Rls 0.6 billion) in the same period of the preceding year.
A breakdown of bank credit by economic activity during the first quarter of 2004 indicates that financing for “miscellaneous” purposes (the bulk of loans to individuals) rose by Rls 9.4 billion to Rls 91.6 billion against a fall of Rls 4.5 billion during the same quarter of the preceding year. Bank credit for “finance” purposes increased by Rls 5.3 billion to Rls 17.1 billion compared to a decline of Rls 0.7 billion in the same period of the preceding year. Credit for “services” purposes went up by Rls 0.8 billion to Rls 9.6 billion compared to a decrease of Rls 0.4 billion during the same period of the preceding year. Credit for “electricity, water and other utilities” purposes grew by Rls 0.2 billion to Rls 2.0 billion compared to an increase of Rls 26.6 million in the same quarter of the preceding year. In contrast, credit for “transport and communications” went down by Rls 1.3 billion to Rls 11.5 billion against a rise of Rls 0.5 billion during the same period of the preceding year.
Credit for “commerce” dropped by Rls 1.1 billion to Rls 50.8 billion against an increase of Rls 1.3 billion during the same period of the preceding year. Credit for
“manufacturing and processing” also declined by Rls 0.5 billion to 26.1 billion against a growth of Rls 1.9 billion in the same period of the preceding year.
3.3 Commercial Banks’ Foreign Assets and Liabilities
Total foreign assets of commercial banks rose during the first quarter of 2004 by 13.6 percent (Rls 11.0 billion) to Rls 92.1 billion compared to a rise of 0.8 percent (Rls 0.8 billion) during the same quarter of 2003. Their total liabilities also increased by 11.7 percent (Rls 4.7 billion) to Rls 44.7 billion compared to a rise of 0.5 percent (Rls 0.2 billion) in the first quarter of 2003. Thus, their net foreign assets increased by 15.5 percent (Rls 6.4 billion) to Rls 47.4 billion compared to a lower growth of 1.1 percent (Rls 0.6 billion) during the first quarter of 2003.
3.4 Reserves, Capital, Profits and Branches of Commercial Banks
Banks reduced their liquidity position during the first quarter of 2004, with total cash in vault and deposits with SAMA decreasing by 20.0 percent (Rls 5.3 billion) to Rls 21.3 billion compared to decline of 21.9 percent (Rls 6.3 billion) during the first quarter of 2003. The ratio of total reserves to total bank deposits at the end of March 2004 stood at 5.7 percent compared to 6.7 percent at the end of
March of 2003. The bulk of the decline was accounted for by deposits with SAMA, declining by Rls 5.1 billion. Cash in vault fell by Rls 0.3 billion.
Banks increased their capital and reserves by Rls 6.1 billion, or 13.0 percent, to Rls 53.1 billion compared to a rise of Rls 1.9 billion, or 4.1 percent during the same period of the preceding year. Capital adequacy of commercial banks according to Basel Standard stood at 17.5 percent at the end of March 2004. Banks also realized profits of Rls 3.7 billion during the first quarter of 2004 compared to Rls 3.0 billion during the same quarter of the preceding year, denoting a rise of 25.8 percent.
The number of commercial banks’ branches operating in the Kingdom stood at 1,210 at the end of the first quarter of 2004 compared to 1,208 at the end of the same quarter of the preceding year. The Central Province accounted for the increase of two branches.
3.5 Banking Technology
SAMA, in cooperation with commercial banks, continued its efforts to develop banking technology in the Kingdom. Several improvements in the Saudi Riyal Interbank Express (SARIE), which had commenced in 2003, were completed.
Under these improvements, SARIE was upgraded to operate under SAMA’s new network (SAMA Joint Network-SJN) instead of the old network (X.25). The new network has the features of high speed of data transfer, more security of information transmitted via the network and the possibility of linking (SARIE) with current systems provided by SAMA and future systems, such “Sadad” system. The
“SARIE’s Firewall” was also replaced by an advanced firewall that can accommodate “SARIE” system along with “Tadawul” system, enhance the ability of data processing and make the network firm and more secure. SARIE’s systems programmes, including the operating system and data base systems, were also upgraded to operate in consistency with modern technology as regards the security of information, network technology and system programming applications. In addition, upgrading of SARIE’s Payments Electronic Archiving System was completed, and thus the archiving process would be carried out within a record time of one hour instead of the earlier six hours. As for the support systems, the work
with 7 banks to prepare SARIE’s Private Contingency Gate Way (PCGW), was finalized. Tests of these gateways were completed successfully, and they were ready to be transferred when the need arises. An integrated plan was made to activate the use of direct debit via SARIE. Under such feature, frequent and periodic payments (of bills for different utility services such as electricity, water and communications as well as regular monthly instalments such as instalments of car and insurance companies) can automatically be settled and a customer will not need to personally visit the bank. Work will be finalized at the middle of the second quarter of 2004.
As for statistics of banking technology, the number of automatic teller machines (ATMs) increased by 113 to a total of 3,789 during the first quarter of 2004 compared to a rise of 91 in the same period of the preceding year. The number of ATM cards declined by 127.7 thousand to a total of 5.9 million compared to a fall of 157.1 thousand during the first quarter of the preceding year. Cash withdrawals through ATMs increased by Rls 0.7 billion to Rls 45.2 billion against a fall of Rls 11.8 billion during the same period of the preceding year. Cash withdrawals through banks’ network went up by Rls 0.3 billion, and withdrawals through SPAN also rose by Rls 0.5 billion. Total number of transactions increased as well by 2.6 million to 90.3 million against a decline 4.1 million in the first quarter of 2003.
The number Points of Sale (POS) terminals increased during the first quarter of 2004 by 847 to a total of 29.9 thousand compared to a rise of 835 during the same quarter of the preceding year. The value of sales transactions made through POS terminals grew by Rls 61.7 million to Rls 5.5 billion.
The value of transactions executed through SARIE was up by Rls 61.2 billion to Rls 1,782.6 billion during the first quarter of 2004 compared to a rise of Rls 303.1 billion in the same quarter of 2003. The number of transactions also increased by 6.7 thousand to 292.9 thousand compared to a rise of 22.2 thousand during the same period of the preceding year.
With regard to clearing house operations, the number of clearing houses in the Kingdom stood at 10, of which 3 were in Riyadh, Jeddah and Dammam.
Clearing houses were developed in 2001 by introducing modern machines, which
depend on light scanning technique for archiving copies of cheques instead of microfilm used previously. The number of cheques (incoming and outcoming) cleared through clearing houses stood at 1.9 million during the first quarter of 2004, and their value totaled Rls 125.8 billion. The number of commercial and personal cheques stood at 1.6 million, with a total value of Rls 89.7 billion. The number of (certified) banks’ cheques was 278.7 thousand, with a total value of Rls 36.1 billion.
Fourth: Share Market Developments
The domestic share market has been growing constantly since the beginning of 2000, recording its peak growth in 2003. The general share price index went up from 1,988 during the first quarter of 2000 to 2,779 during the first quarter of 2003 and further to 4,437 at the end of the last quarter of 2003. Such large increases in the share market were due to a number of factors, including continued increase of economic activity, a rise in companies’ profits, increased confidence in the domestic market, a decline in interest rates on deposits and expanding number of investors.
During the first quarter of 2004, the general share price index rose by 86.5 percent over its level in the same quarter of the preceding year to reach 5,183. The number of shares traded also increased by 337.8 percent to 2,107 million, and their value rose by 493.4 percent to Rls 261.7 billion. The number of transactions grew by 429.5 percent to 1.9 million. As a result of the increase in price level, market capitalization went up by 89.0 percent to Rls 694 billion.
Fifth: Price Indices
Domestic prices recorded a small decline during the period 1999-2002. The general price index, issued by Central Department of Statistics, went down from 100.0 in 1999 to 98.0 in 2002. The decline was accounted for by a fall in price indices of “fabrics, apparel and shoes”, “house furnishings”, “transport and communications” and “all food”. However, it rose in 2003 by 0.6 percent to 98.6.
During the first quarter of 2004, the general price index went up by 0.3 percent over its level during the same quarter of the preceding year. As a result, price indices of all food group and medical care group increased by 2.6 percent and
0.2 percent respectively. In contrast, price indices of fabrics, apparel and shoes group declined by 1.8 percent, followed by house furnishings group by 1.6 percent, transport and communications group by 0.4 percent and education and entertainment group by 0.7 percent.
Sixth: Supervisory and Control Developments during the First Quarter of 2004
6-1 Legislative and Regulatory Developments.
(a) SAMA issued on 19/1/2004 a circular to all operating banks in the Kingdom on Rules Governing Loan Classification, Provisioning and Credit Review. The Rules came into effect as of the beginning of the first quarter of 2004.
(b) SAMA issued on 5/3/1425 (24/4/2004) a circular requiring all banks to liquidate the real estates entitled to them for the settlement of debts of insolvent debtors.
(c) SAMA issued on 21/3/2004 a circular to all banks operating in the Kingdom on constituting a committee to control banking services provided by banks on interest-free basis in view of the importance of such services and their considerable growth over the past years and to ensure that such services and other products are consistent with the Islamic Sharia Law. The Committee, which is composed of representatives of domestic banks and other specialists from SAMA, has started to hold its meetings. Its objectives are to control and supervise Islamic banking transactions within an efficient regulatory and supervisory framework, to unify definitions and terms used for Islamic banking products, to enhance transparency, and protect customers.
(d) Freezing the accounts of individuals and entities for failure to update data came into effect as of the end of March 2004.
(e) A draft circular on Fit and Proper principle regarding “requirements for appointment to leading posts in licensed banks or those applying for license to operate in the Kingdom” was sent to domestic banks to have their comments on this issue in accordance with SAMA’s circular dated 27/2/1425 corresponding to 17/4/2004.
(f) The increase in the capital of some banks was approved as shown in the table below:
Amounts in millions
Name of the bank
Previous capital (December
2003)
Amount of the increase
Percentage of increase
Current capital Beginning
of 2004
Arab National Bank 1,800 200 11.11 2,000
Saudi British bank 2,000 500 25.00 2,500
Saudi Hollandi Bank 945 315 33.33 1,260
Saudi Investment Bank 1,100 275 25.00 1,375
Seventh: Regulatory Developments in the Saudi Economy during the First Quarter of 2004.
The Saudi economy witnessed some regulatory developments during the first quarter of 2004. The most important of these are the following:
7-1 The Council of Ministers issued on 1/2/1425 (22/3/2004) its Resolution approving the bifurcation of the Ministry of Labour and Social Affairs into the Ministry of Labour and the Ministry of Social Affairs.
7-2 The Council of Ministers issued on 3/1/1425 (23/2/2004) its Resolution approving the conversion of the Pension Fund into the General Pension Organization.
7-3 Upon the Council of Ministers’ approval at its meeting on 20/11/1424, a Royal Decree was issued on 15/1/1425 (6/3/2004) approving the Law of Income Tax on non-Saudi companies and Individuals and GCC citizens conducting business activities in the Kingdom. The new tax law’s salient features are as follows:
First: Persons subject to the income tax
The income tax shall be applied on non-Saudi companies and individuals and GCC citizens conducting business activities in the Kingdom, including the following:
1- Resident trust companies, with the tax to be imposed on shares of non- Saudi partners.
2- A natural non-Saudi resident person who practices a business activity in the Kingdom.
3- A non-resident person who practices a business activity in the Kingdom through a permanent firm.
4- A non-resident person who has an income from another source in the Kingdom subject to income tax.
5- A person who works in the area of natural gas investment.
6- A person who works in the area of oil and hydrocarbons production.
Second: An activity referred to “in this law” means all types of commercial activity, professional and handicraft activities, and any similar activity aiming at profit seeking, including the employment of movable and immovable assets.
Third: Under the law, tax rates shall be as follows:
1- The tax rate on a tax base shall be 20 percent for a) A resident trust company.
b) A non-Saudi resident natural person who conducts a business activity.
c) A non-resident person conducting a business activity through a permanent firm.
2- The tax rate on a tax base for a tax-payer working in the area of natural gas investment shall be 30 percent.
3- The tax rate on a tax base for a tax-payer working in the area of oil and hydrocarbons production shall be 85 percent.
Forth: This law shall come into effect after 90 days from the date of its publication in the official gazette, and it shall abolish the previous Income Tax Law issued under Royal Decree No. 3321 dated 21/1/1370.
592y04
