Saudi Arabia tries to cool stock market with treasury notes

Saudi Arabian stocks have been reaching their highest levels in almost six years. The benchmark Tadawul All Share Index is up 16.3 per cent so far this year.
An investor tracks Saudi share price movements on a computer screen. The benchmark Tadawul All Share Index is up 16.3 per cent so far this year. Waseem Obaidi / Bloomberg NEws
An investor tracks Saudi share price movements on a computer screen. The benchmark Tadawul All Share Index is up 16.3 per cent so far this year. Waseem Obaidi / Bloomberg NEws

Bank holdings of treasury bills in Saudi Arabia rose to a record high in March, indicating the government may be responding to concerns about overheating in the stock market by selling more notes.

Total treasury holdings by banks rose to 209 billion Saudi riyals (Dh204.68bn), up 14.8bn riyals on the month before, according to data from Jadwa Investment, the investment bank based in the kingdom.

“We suspect that the government may be concerned that excess liquidity in the stock market could create the risk of a bubble similar to 2006,” said Fahad Alturki, the head of research at Jadwa. “The higher holdings suggest the Saudi Arabian Monetary Agency could be trying to manage liquidity in the banking system.”

In the past few days, Saudi Arabian stocks have been reaching their highest levels in almost six years. The benchmark Tadawul All Share Index is up 16.3 per cent so far this year. The gains have been driven partly by asset managers redeploying capital from faster-growing regional markets such as the UAE and Qatar, and improving corporate earnings.

Selling treasury bills to banks in the kingdom can help control the pace of financial flows into the equities market. Usually with a tenor of one year or less, the notes have been a frequent tool used by the monetary agency to check liquidity levels. March’s jump in bank treasury holdings is the steepest since February last year, when concern about inflation prompted the central bank to issue a flurry of bills. Then, treasury holdings surged by 24.8bn riyals in one month.

Inflationary pressures are more muted this time, with annual inflation slipping for a fourth consecutive month in March to 2.6 per cent. Instead, the impetus for the latest sales comes from an abundance of liquidity in the financial system, with bank deposits climbing by 2.5 per cent during the month, the fifth monthly gain in a row. Regulators want to ensure that not all that capital flows into stocks.

Some analysts have been warning about a correction in parts of the market in recent weeks.

“In general, we believe that the Saudi Arabian market is expensive, particularly given unspectacular first-quarter earnings. We expect weaker performance in the second quarter,” wrote Simon Kitchen and Mohamed Al Hajj, analysts at EFG-Hermes, the Egyptian investment bank, in a research note last week.

They warned that an improvement in other emerging markets or a pickup in developed market stocks could suck money out of regional equities.

Jithesh Gopi, the head of research at Al Rajhi Capital, another financial firm in the kingdom, wrote in a note last month that a correction in the food and retail sector should “not come as a surprise” as the sectors were trading at a premium after a recent runup.

Mr Alturki also believes a cooling-off is inevitable.

“I don’t think the strong growth in the market will continue at the same rate as the last six months,” he said. “It will slow down, matching the slowdown in the non-oil economy.”

He expects Saudi Arabia’s non-oil economy to cool to 5.5 per cent this year, compared to an annual average of 7.7 per cent in the years since 2008. He cites the drag of waning government stimulus spending and an easing in the fastest-growing sectors of retail, transportation and construction as a result of labour market reforms.

The contribution of oil revenues to the economy is also forecast to fade as crude output shrinks because of more supplies hitting the market from North America and fellow Opec members Libya, Iraq and Iran.

tarnold@thenational.ae

Follow us on Twitter @Ind_Insights

Published: May 5, 2014 04:00 AM

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