Saudi Arabia: Liquidity conditions tighten

Credit growth in Saudi Arabia has continued to exceed deposit growth in the kingdom, with private sector credit up 1.3% m/m and 14.6% y/y in August while broad money supply growth accelerated to 9.0% y/y from 8.1% in July. Public sector borrowing also remains robust at 5.4% m/m and 25.8% y/y in August.  

SAMA had stepped in to provide additional liquidity to the interbank market in June, and this was reflected in a sharp decline in the spread of Saudi interbank rates over corresponding USD rates. The 3m Saibor-3m USD Libor spread turned negative briefly last month but has widened again over the last couple of weeks reflecting tighter liquidity conditions in the kingdom’s interbank market.

3m Saibor - 3m USD Libor spread

Source: Bloomberg, Emirates NBD Research

Net foreign assets at the central bank declined -USD 6.4bn to USD 440bn in August, broadly in line with where it was at the end of 2021, despite the significant fiscal surplus that has been generated year-to-date.  The kingdom has provided financial support to other MENA countries in recent months as they have faced higher food and energy prices, putting pressure on current account deficits and pushing up inflation.  The support has been largely in the form of central bank deposits and FDI. Some of the oil windfall this year has likely been diverted to the Public Investment Fund, which may have focused on investments abroad. Ultimately, we do expect more the fiscal surplus to be deployed domestically in order to finance megaprojects, other infrastructure and development of key strategic sectors such as leisure and tourism.  

Saudi Arabia is likely to cut production by around 500k b/d from November following OPEC+’s decision to implement nominal cuts of 2mn b/d. However the kingdom had increased production to close to 11mn b/d in recent months, levels that have historically not been sustained. If production is maintained at 10.5mn b/d through 2023, the oil and gas sector will still likely contribute positively to headline GDP next year, particularly as the Aramco has committed to increased investment to boost production capacity for both crude oil and natural gas in the coming years.

Saudi Arabia: Oil production

Source: Bloomberg, Emirates NBD Research

The fiscal impact of oil production cuts will limited in our view, with higher oil prices offsetting slightly lower volumes. We have reduced our budget surplus forecast for 2023 to 7.0% of GDP from around 7.5% previously, and have also recently revised down our forecast for this year’s budget surplus to 7.6% from over 10% previously. 

Our forecasts are still much higher than the finance ministry’s own projections, published in the preliminary budget statement for 2023.  The government has projected an almost balanced budget for next year (SAR 9bn or 0.2% GDP), lower than its prior estimate of SAR 27bn.  The main difference is due to revenue assumptions: the finance ministry has likely based projected revenues on a conservative oil price assumption of around USD 80/b, which is much lower than our forecast of an average of USD 105/b in 2023. The government forecasts GDP growth of 3.1% in 2023, slightly lower than our 3.5% forecast.