Shrinking Saudi money supply points to slowing economy

[DUBAI] Saudi Arabia's money supply shrank in February for the first time in more than a decade, central bank data showed on Tuesday, in a fresh sign the economy of the world's largest oil exporter is slowing sharply because of depressed oil prices.

The broadest measure of money supply published by the central bank, M3, dropped 0.9 per cent from a year earlier last month, its first annual decline since at least 2004.

Narrower money supply measures M1 and M2 also shrank. M1, which includes currency in circulation and demand deposits but excludes less liquid assets such as savings and time deposits, contracted a hefty 5.1 per cent. "This is part of a trend. It's concerning in that it reflects the size of banks' balance sheets ... The figures are generally an indicator of domestic demand," said William Jackson, senior emerging markets economist at London's Capital Economics.

Low oil prices pushed the budget into a deficit of nearly US$100 billion last year and the government has embarked since late 2015 on spending cuts and tax rises to narrow the gap, hitting consumer spending and companies' willingness to invest.

Money supply figures are often volatile, and the February data contained some moderately positive factors - bank lending to the private sector expanded 10.0 per cent from a year earlier.

But cash withdrawals from automated teller machines, one indicator of consumer spending, sank 13 per cent from a year ago in February. The year-earlier total was inflated by a two-month salary bonus for public employees to mark the accession of King Salman; such largesse looks unlikely to be repeated.

More economic pain is expected in coming months because, in a fresh austerity step, the government ordered ministries in mid-March to cut their spending on contracts by at least 5 per cent.

Jackson said Riyadh's massive fiscal reserves meant it could probably manage the spending cuts to avoid an economic recession. Net foreign assets at the central bank, which acts as the kingdom's sovereign wealth fund, totalled $584 billion in February, the data showed.

That marked a 17.3 per cent drop from a year earlier, as the central bank liquidated reserves to pay the government's bills, but the current level of assets suggests Riyadh could continue spending at its present pace for several years.

However, Jackson said the country was in for a lengthy fiscal squeeze that would push economic growth down to 1.5 per cent this year and 1.0 per cent next year from an estimated 3.4 per cent in 2015.

Because of the austerity measures, inflation has risen sharply, which is expected to deter consumers. Annual consumer price inflation jumped to 4.3 per cent in January, the highest in over three years, from 2.3 per cent in December after the government cut fuel subsidies and hiked utility fees.

REUTERS