* Central bank’s net foreign assets fall sharply in October, pulling growth
* Commercial bank deposits rebound by large margin
* Indicates money being brought in to pay state’s debts
* Non-oil growth expected to see boost in Q4
* Foreign bond issue permits suspension of domestic borrowing
Saudi Arabia’s government has begun injecting large amounts of money into the economy, which could boost growth at the end of this year after a sharp slowdown due to low oil prices, central bank data showed on Monday.
Its finances strained by shrunken oil revenues, Riyadh raised $17.5 billion last month in its first international bond issue – the biggest emerging market bond sale on record.
Riyadh did not hold that money overseas but quickly brought it into the country, Monday’s data indicated. Instead of expanding because of the bond proceeds, the central bank’s net foreign assets shrank by $10.8 billion from the previous month to $535.9bn in October – implying the government may have brought home a total of about $28.3bn last month.
Meanwhile, total deposits at Saudi commercial banks, which had been trending lower because of government spending cuts, jumped by SAR27.2bn ($7.2bn) in October to SAR1.610 trillion – their biggest increase in more than a year.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said the figures suggested the government was bringing large amounts of money into the country to settle its debts to construction firms and other companies, after delaying those payments for months.
“The drop in foreign assets implies much of the bond proceeds and more are being used to pay arrears to the private sector,” she said.
Central bank officials could not be reached for comment on Monday, but top government officials have said in recent weeks that they planned to settle debts to companies.
Fahad al-Hammadi, chief of the National Contractors’ Committee at the Council of Saudi Chambers, told the Arab News last week that Riyadh had paid SAR 40bn to construction firms.
He predicted a further SAR100bn of payments by the end of this year which, he said, would mean the government had settled more than 80 per cent of its debts to the sector.
The payment delays hurt economic growth, which slowed to 1.4 per cent from a year earlier in the second quarter of 2016 – the lowest rate in over three years. So the clearing of state debts could help the economy rebound.
“We can expect to see a boost to real non-oil activity in the fourth quarter,” said Malik.
She noted the central bank data showed cash withdrawals from automated teller machines edged up in October, suggesting cuts to public employees’ financial allowances might not be having as big an impact on the economy as some analysts had feared.
The liquidation of the central bank’s foreign assets brought them down 16.3 per cent from a year earlier to their lowest since December 2011. They reached a record high of $737bn in August 2014 before starting to fall as the government covered a huge budget gap caused by cheap oil.
The central bank drew down its foreign deposits sharply in October, by $11.6bn to $102.7bn, while its foreign securities holdings increased by $2.5bn to $375.1bn.
In addition to financing payment of the government’s debts, last month’s international bond issue appears to be helping the economy by reducing pressure for Riyadh to borrow domestically.
Monthly issues of domestic bonds to banks since mid-2015 pushed market interest rates up sharply through last month, when the three-month Saudi interbank offered rate hit a seven-year high of 2.386 per cent.
Since then, however, Riyadh has been able to suspend domestic bond issues for two consecutive months, easing pressure on banking system liquidity and bringing three-month SAIBOR down to 2.0920 per cent.
Another bond issue?
A Saudi banker told Reuters he believed the government could avoid a domestic bond issue in December as well, permitting a further fall in SAIBOR. Local issuance may resume early in 2017 but not as aggressively as this year, since Riyadh could issue international bonds again as soon as the first quarter, he said.
“The banking system is very liquid and stress on the banks has been reduced. Day-to-day liquidity is at the highest in 18 months.”