RIYADH: Saudi banks experienced a 9.21 percent year-on-year increase in money supply in October, reaching SR2.94 trillion ($782.96 billion), according to the Kingdom’s central bank, SAMA.
A notable driver of this growth was term deposits, which surged by 15.34 percent to SR971.1 billion during the same period. Demand deposits, constituting the largest portion of the money supply at 48.55 percent or SR1.42 trillion, grew at a more modest rate of 8.63 percent.
In contrast, other quasi-money deposits, which make up 10.64 percent of the money supply, declined by 4.27 percent, totaling SR312.51 billion. Time and savings deposits accounted for 33.07 percent of Saudi Arabia’s money supply in October, marking their highest level in nearly 15 years.
This upward trend has been fueled by SAMA’s alignment with the US Federal Reserve’s interest rate policy. The Fed’s tightening cycle, which peaked at 6 percent in July 2022, encouraged depositors to shift towards interest-bearing accounts to capitalize on higher rates. This policy, aimed at curbing inflation, made interest-generating accounts more appealing to Saudi depositors.
A key factor in the growth of term deposits has been the influence of institutional deposits, particularly from government-related entities. According to Fitch Ratings, these entities accounted for 70 percent of total deposit inflows in 2023. This strategic allocation of funds into time deposits not only provided banks with essential liquidity but also underscored the importance of bulk deposit agreements with favorable terms.
Despite the Federal Reserve’s shift towards monetary easing, reducing rates by 50 basis points in September and an additional 25 basis points in November, term deposits in Saudi banks continue to gain popularity. Government-linked entities seem to favor term deposits due to their stability and potential returns.
The predictability of these deposits aligns well with the broader macroeconomic environment, helping banks manage liquidity pressures and maintain operational stability. Another contributing factor could be the interest rate lag, where the transmission of lower benchmark rates into domestic banking systems takes time, keeping deposit rates competitive and maintaining the appeal of time deposits.
Time and savings accounts, while vital for liquidity management, are generally a more expensive funding source for banks due to interest obligations. However, Saudi banks have managed to maintain strong profitability metrics, with most reporting robust financial results in 2023 and expected to do so through 2024.
Fitch Ratings anticipates this strength to continue throughout 2024, supported by favorable macroeconomic conditions and the Kingdom’s high operating environment score of bbb+, the highest among Gulf Cooperation Council banking sectors and emerging markets globally.
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