February records reflected a substantial 10.26 percent year-on-year increase in Saudi banks’ total deposits, hitting the SR2.54 trillion ($677 billion) mark, according to the latest official figures. An analysis of the data released by the Saudi Central Bank highlighted a significant 26 percent annual surge in time and savings deposits, which amounted to SR838.53 billion.
Demand reserves experienced a 2.85 percent increase, reaching SR1.25 trillion, while the volume of other quasi-money grew by 7.57 percent to SR352 billion. Despite demand deposits holding the lion’s share at 53 percent, a notable decrease from 57 percent the previous year, the rise in interest rates has shifted the balance towards term reserves, now seen as more attractive for those seeking better returns.
However, a month-on-month dip of 3 percent in term deposits was observed, marking the first decrease in a year and a half. This change comes as the upward trajectory of term deposits, influenced by rising US Fed rates, begins to plateau following the Fed’s decision to maintain the current rates in their March meeting, with the last increase occurring in July 2023.
Despite these fluctuations, Saudi Arabia has successfully managed inflation through effective government policies. The nation’s currency, pegged to the US dollar, necessitates the central bank to align with the Fed’s interest rate decisions closely.
The most significant growth in term deposits was seen in the business and individual sector, which shot up by 36 percent to SR450 billion. Government entities also saw a 16.4 percent increase, reaching SR388.15 billion.
The rise in bank deposits is noteworthy, but the growth in loans has surpassed deposit increases, intensifying the pressure to support the burgeoning local economy. MEED Projects, a Dubai-based analytics company, estimates Saudi Arabia’s construction sector will require a staggering $640 billion over the next five years. Banks may need to generate approximately $384 billion in this period if they are to finance 60 percent of these projects through a combination of increased deposits and debt.
While Saudi reserves continue to be a primary funding source, an estimated 15 percent of the necessary funds might have to be raised through debt, potentially leading to an annual new debt issuance of about $11.5 billion, as per Edmond Christou, a senior financial analyst at Bloomberg Intelligence.
Financial institutions are seeking to enhance liquidity to meet substantial construction demands, with plans to amass more deposits and tap into the international debt market. Debt issuance is on the rise, with $6.8 billion sold this year alone, exceeding the total for the previous year.
Despite these funding challenges, Saudi Arabian banks maintain healthy balance sheets, as most major lenders are rated as investment grade with a stable outlook by S&P Global Ratings. Nonetheless, S&P has indicated these financial institutions cannot shoulder the entire financial load of the nation’s Vision 2030 development plan.
Government and associated entities primarily fund projects, with the well-funded Public Investment Fund planning to invest $70 billion annually post-2025 and exploring its fundraising options.
There is an anticipation of banks entering the fixed-income market, bolstered by improved liquidity since the year’s start. This is reflected in the easing of Saibor, a key indicator of borrowing costs in Saudi Arabia, from its peak of 6.4 percent in January, although it remains above 6 percent due to high US rates.