Saudi Arabia Chart Book

Transcription

1 This and othercations can be Downloaded from Saudi Arabia Chart Book Executive Summary Office of the Chief Economist Economics Department Samba Financial Group P.O. Box 833, Riyadh Saudi Arabia ; Ext (Riyadh) (London) Global economic activity has continued to quicken. The upturn has been led by advanced economies, with the UK accelerating rapidly, the US and Japan reporting steady growth and the euro-zone finally coming out of recession. Emerging Market performance has varied widely between countries, though in general activity has picked up from the second quarter, when there was a major sell-off across EM assets. Manufacturing output has gathered pace in China, and all eyes are on the Communist Party s Third Plenary Session, which might include significant policy announcements such as rapid financial sector liberalisation. This offers the prospect of a redirection of credit away from inefficient SOEs towards hitherto capitalconstrained but much more efficient private enterprises. Oil prices have drifted down owing mainly to a build-up of stocks, as well as hints of substantive progress in Iran s nuclear talks, which might see the oil embargo lifted. Prices would likely have declined further were it not for continuing outages in a range of producing countries, most notably Libya. Saudi Arabia has stepped up production to compensate, and it is now likely to keep production high for much of 2014 given the intractability of some of these production problems. Industrial metals prices have been mixed as investors weigh the competing propositions of early tapering in the US against firmer demand from China. The outlook for iron ore and copper is coloured by a number of mining projects set to come on line next year, which might see supply outpace demand. That said, the mining industry has a long record of under-delivering on promised production. After a soft second quarter, leading indicators suggest that activity in Saudi Arabia gathered pace again in the third quarter, with nonoil exporters benefitting from the pick-up in Chinese demand. It is not clear whether momentum has been sustained into the fourth quarter: the PMI fell back in October (though it remains firmly in expansion mode) and retail sales have been quite volatile. The crackdown on illegal expatriate labour is now underway (the amnesty expired in early November) and this might disrupt sectors such as construction and retail. Competition among Saudi private firms remains intense, and profit margins have continued to narrow, as companies choose to absorb an increase in input costs to protect market share. Consumer price inflation has continued to slow. 1

2 November 2013 The Global Economic Backdrop Advanced economies are seeing a strong second half of the year. China s manufacturing PMI accelerated to its highest reading in 18 months in October, reflecting the impact of the government s ministimulus in the second and third quarters. However, the sub index for new orders an important leading indicator declined. This might reflect a wait and see attitude among investors as they await policy announcements from the Communist Party s Third Plenary Session. The US Fed s decision to delay tapering has allowed market interest rates to drift down again. The consensus suggests that tapering will be delayed until March 2014, though a January or even December start cannot be ruled out. 2

3 November 2013 The tapering delay has seen the key mortgage rate retreat from recent highs, but housing starts have in any case been holding up well. The delay has also restored risk appetite somewhat and the selloff in Emerging Market assets has partially reversed. This has helped relieve pressure on the Indian rupee. 3

4 November 2013 The rupee has also gained support from a rise in policy rates, as the new central bank governor vows to get a grip on inflation. Meanwhile, Turkey s central bank governor has ruled out any interest rate rise this year, and the lira has remained under pressure. Most expect that the policy rate will have to rise in the first half of next year. The dollar has been generally weak, but in late October pension funds and institutions bought the most dollar assets since January Tapering (whenever it begins) will be positive for the dollar, while the ECB s recent rate cut has also lent support to the greenback. 4

5 November 2013 Commodities Oil prices have cooled recently, thanks largely to gains in global stocks. The prospect of an eventual lifting of the Iran oil embargo has also weighed on prices. Prices would likely have fallen further were it not for a number of outages. These have removed about 1 mbd from the market, around 0.5 mbd above average. The biggest casualty has been Libya, but Nigerian output has also been on a downward trend. Many thought that Iraqi output would more than make up for these declines. However, a spurt in the second half of last year proved transitory and output has since fallen back owing to technical constraints and sabotage. Consequently, Saudi Arabia has taken up the slack, keeping output at or near 10 mbd for some months now output is now expected to be higher than first thought given the intractability of the problems noted elsewhere. However, we expect output to decline again in

6 November The trajectory of Saudi production and the short term outlook for prices will be influenced by the pace of progress in Iran s talks with the West. Contrary to expectations talks appear to have been substantive. Lifting the oil embargo on Iran is likely to be a gradual process, tied to progress on nuclear verification. The futures market still points to a gradual downward drift in prices based on the fundamentals of strong gains in North American output and a lacklustre demand picture. Demand growth is likely to be confined to around 1 mbd in the next few years, according to PFC Energy; pre-financial crisis, demand was growing at around 1.6 mbd. 6

7 November 2013 US natural gas prices have stabilised in the past few months. It s notable that a couple of major US gas firms have announced reduced capital spending in the face of falling prices. Weaker investment points to slower future production, and might help to provide a floor for US gas prices. This aside, the long term decline in US natural gas and NGLs prices has given American petrochemicals producers a key cost advantage over European and Asian rivals, which generally rely on naphtha as feedstock. Only Middle East producers enjoy lower feedstock costs. Nevertheless, dynamics are changing. The Obama administration s decision to lift the ban on US gas exports should help to equalise prices over the long term. Other nonoil commodities continue to be influenced by activity in China. Most (including us) expect the Chinese economy to slow next year, but this will be from a higher base and demand for a range of base metals is likely to remain reasonably firm. 7

8 If the Chinese authorities decide to embark on a major social housing programme (something the new leadership has focused on) then this could provide major support to iron ore and steel rebar. For the moment, iron ore, steel and copper inventories in China remain low and restocking should support prices in the short term. However, a number of global mining projects are set to come on line next year, which might see supply outpace demand. That said, the mining industry has a long record of under-delivering on promised production. Ethylene prices have moved lower. Moody s thinks that any upturn in demand will not be enough to offset the overhang of supply and expects prices to remain soft into

9 November 2013 Saudi Arabia There was mild upward (depreciation) pressure on the Saudi riyal earlier in the year as EM assets saw a broad sell-off. But with a closed stock market and substantial foreign reserves, the peg to the dollar was never under any material threat. The central bank has continued to accumulate foreign reserves following small drawdowns earlier in the year. The impact of the mild downward drift in oil prices has been mitigated by enhanced Saudi crude production. The pace of bank lending to the private sector has eased. In general, banks are focusing on retail lending growth, where population and wage dynamics suggest plenty of potential. However, lending to projects has slowed in line with weaker investment spending. 9

10 The weaker pace of lending growth is reflected in a gentle drift of the main interbank lending rate. Saudi banks are liquid: the loan-deposit ratio is around 82%. The slowdown in the construction sector is evident in letters of credit, which contracted in mid-year. Nevertheless, there was a small rebound in September as activity recovered somewhat. Retail sales remain generally strong, continuing to post double-digit year-on-year growth. 10

11 The nonoil private PMI remains firmly in expansion mode. The third quarter saw a decent acceleration led by nonoil exports, but the October reading was something of a disappointment: the rate of output growth in October was the second weakest in the 51 month survey history. The pace of new orders, which is a leading indicator of future output growth, fell back in October and was the lowest in three months. Meanwhile, external demand has picked up. New export orders spiked sharply in September and October reflecting the recovery in Chinese demand. The October reading was the highest recorded in the survey s history. 11

12 Employment growth has cooled, with the index once again only just above the breakeven. Dislocations caused by the more rigorous enforcement of employment regulations for foreign nationals undoubtedly contributed: an amnesty allowing foreign workers to get their affairs in order expired in early November. The crackdown has now begun in earnest. There is likely to be some negative impact on retail services especially, and commercial property prices could come under further pressure. Firms input prices have increased in line with a weaker dollar putting upward pressure on raw materials prices. Saudi firms have continued to absorb these rising costs, putting ever greater pressure on margins. The prospect of a strong dollar should provide some relief. 12

13 As firms absorb higher costs and domestic activity eases, so inflationary pressures have cooled. Residential property prices have ticked up, but this is not a bubble since prices are wellsupported by fundamentals. The stock market has continued to do well. 13

14 Third quarter results were mixed. Retail firms have continued to fare well, but construction has suffered from the crackdown on illegal workers, as well as a weaker pace of investment spending. Petrochemicals firms have had a tough year or so, but performance appears to be heading in the right direction. 14

15 Saudi Arabia: Baseline Macroeconomic Forecast f 2014f 2015f Nominal GDP ($ bn) GDP per capita ($ '000) Real GDP (% change) Hydrocarbon GDP Non-hydrocarbon GDP Nominal GDP (% change) Hydrocarbon GDP Non-hydrocarbon GDP Commercial bank deposits (SR bn) % change Commercial bank loans (SR bn) % change month interbank rate (end year, percent) CPI inflation (% change, average) Hydrocarbon exports ($ bn) % change Current account balance ($ bn) (% GDP) External debt ($ bn) (% GDP) (% current account receipts) Fiscal revenue (SR bn) (% change) Fiscal spending (SR bn) (% change) of which, capital (% change) current (% change) Fiscal balance (SR bn) (% GDP) Public sector deposits with banking system (SR bn) (% GDP) Public sector gross domestic debt (SR bn) (% GDP) Public sector net deposits with banking system (SR b (% GDP) Memoranda: Oil price (Brent; $/barrel) Net Foreign Assets ($ bn) (% GDP) Foreign liabilities of Saudi banks and non-financial enterprises. Sources: SAMA; Ministry of Finance and National Economy; World Bank; Samba. 15

16 James Reeve Deputy Chief Economist Andrew Gilmour Deputy Chief Economist Thomas Simmons Economist Disclaimer This publication is based on information generally available to the public from sources believed to be reliable and up to date at the time of publication. However, SAMBA is unable to accept any liability whatsoever for the accuracy or completeness of its contents or for the consequences of any reliance which may be place upon the information it contains. Additionally, the information and opinions contained herein: 1. Are not intended to be a complete or comprehensive study or to provide advice and should not be treated as a substitute for specific advice and due diligence concerning individual situations; 2. Are not intended to constitute any solicitation to buy or sell any instrument or engage in any trading strategy; and/or 3. Are not intended to constitute a guarantee of future performance. Accordingly, no representation or warranty is made or implied, in fact or in law, including but not limited to the implied warranties of merchantability and fitness for a particular purpose notwithstanding the form (e.g., contract, negligence or otherwise), in which any legal or equitable action may be brought against SAMBA. Samba Financial Group P.O. Box 833, Riyadh Saudi Arabia 16