SAUDI ARABIA 2018 OUTLOOK January 2018

Transcription

1 SAUDI ARABIA 218 OUTLOOK January 218 Tel: Fax: Toll Free Number: King Fahad Road-Office 1 Riyadh Saudi Arabia CMA License Number: CR: CCR: MEFIC MEFIC Capital

2 Table of Content A. Executive Summary... 3 B. Saudi Economic Outlook C. Equities outlook... 1 D. Real Estate Sector Outlook E. Private Equity Outlook F. Conclusion... 3 G. Annexure 1: Chart Pack I. Macroeconomic Indicators II. Oil Indicators III. Stock Market Indicators IV. Corporate earnings... 4 V. Tadawul Sector Earnings Performance H. Annexure 2: Saudi Arabia Key Statistics SAUDI ARABIA 218 OUTLOOK January 218 P a g e 2

3 Executive Summary A. Executive Summary Key factors Key positives Key Risks Outlook Economic Outlook GDP Growth Oil Prices Oil Production Fiscal policy Credit growth Monetary policy Fiscal Deficit Large government spending Oil prices on the rise Room to raise debt and preserve forex reserves Entrenched slowdown taking time to turnaround economy Production cut deal collapse Interest rate increases Cautiously Positive Equities Outlook Earnings growth MSCI /FTSE inclusion Trading volumes Dividend yield Valuations Possible inclusion in FTSE and MSCI indices Consumption related sectors to benefit from government spending Possible Aramco listing to boost sentiment Delay in inclusion in benchmark indices Price increases to impact consumer sentiment Low foreign investor interest Positive Real Estate Outlook Demand Supply Balance Occupancy levels Rent growth Economic Outlook Government support Government incentives for affordable housing to increase supply and encourage demand Rising rates Rents stagnation Long term Positive Private Equity Outlook Number of funds Deal activity Exit via NOMU Demand for private capital Economic revival leading to greater investor interest in Private Equity funds High valuations; too many funds chasing fewer opportunities Long term positive SAUDI ARABIA 218 OUTLOOK January 218 P a g e 3

4 Executive Summary Executive Summary After a truly forgetful 217, Saudi Arabia is looking forward to 218 with renewed hope. Oil prices were subdued for most part of the year. The government kept a tight leash on spending for first three quarters (government expenditure for 9M217 increased only.% year-on-year), while private sector also held back on investments, reflected in credit growth. However, the end of 217 brought good news. Oil prices started moving up, as the market realized the commitment of oil producers participating in the production cut. Saudi government accelerated spending in Q4 217 (38% year-onyear increase), which has started to reflect in economic data being released now with a lag. The prospects for 218 look much better, owing to large government spending plans on both capital and current account. Economic prospects improve The year 217 saw an economy in decline - GDP de-growth of.7% (Figure 31, Annexure 1), consumer inflation in negative territory for 1 months (Figure 29, Annexure 1), declining credit growth (Figure 44, Annexure 1) for most part of the year, cement sales among the lowest in past several years (Figure 32, Annexure 1) and similar other macroeconomic indicators partly contributed by lower oil prices (Figure 78, Annexure 1) and subsequent tightening of government spending in first three quarters of 217. However, with oil markets improving in last few months of 217, and government spending in Q4 217, few demand indicators have started to improve. The PMI Index (Figure 31, Annexure 1) started to move up consistently, while non-oil GDP growth (Figure 27, Annexure) also was on the up move. The year 218 has begun on a positive note, with the International Monetary Fund (IMF) increasing its estimate of GDP growth to 1.6% from 1.1% earlier (Figure 1, Saudi Economic Outlook 218 section). Equity markets looking for key triggers Equity markets, in spite of a late surge towards end of the year, could only manage to end flat for the year. However, a late boost to government spending in December quarter, an expansionary budget for 218 (Figure 2, Saudi Economic Outlook 218 section) and rising oil prices augur well for Saudi Arabian economy and capital markets, notwithstanding the introduction of Value Added Tax (VAT), fuel and electricity price increases and expat tax. Saudi equity markets look set to benefit from generous government spending in 218 (assuming it is fully realized), both in terms of project/capital expenditure (beneficiaries construction, cement, capital goods) and current expenditure in the form of special allowances, citizens account program as well as policy changes in housing sector (beneficiaries consumption related sectors such as retail, food and beverages, real estate). The increased possibility of inclusion of Saudi Arabia in MSCI and FTSE indices in 218 will start attracting foreign institutional investments in to Saudi equity markets. A possible IPO of Aramco in second half of 218 will be a landmark event. Real Estate market to take its time to revive Saudi Real Estate sector witnessed the government s renewed focus on affordable housing and policy coordination in 217. Saudi Arabian Monetary Authority (SAMA) increased the mortgage limit for housing loans from 7% in 216 to 8% in 217, and now 9% in early 218. In parallel, Real Estate Development Fund (REDF) announced supporting interest payments on mortgage loans for Saudi citizens for up to SAR,. More such coordinated actions by multiple government agencies may SAUDI ARABIA 218 OUTLOOK January 218 P a g e 4

5 Executive Summary be expected in 218. These measures will help towards meeting the large residential housing demand. The office and retail space may take time to improve as occupancy levels change with greater economic activity, which should reflect in rate levels (Figure 37, Annexure1). We also witnessed in 217 a growing trend of listing of Real Estate Investment Trusts (REITs) towards second half of 217, which appears to continue in 218 as well. Private Equity market long term prospects in place Saudi Private Equity space is also gaining traction along with rest of economy. While the government is encouraging small and medium enterprises by having Public Investment Fund (PIF) earmark part of their investment for such enterprises, private equity investors are also increasing fund raising and seeking investment deals in specific sectors - such as consumption, healthcare, education which have long term demographic drivers and appear relatively insulated from the fluctuations in oil prices and changes in fiscal policy. Valuations have also become more attractive with the fall in public equity markets. On the backdrop of Saudi Vision 23, which envisages a greater role for private companies contribution to economy, the need for capital by such companies will provide opportunities for private equity investors. The availability of NOMU as an exit vehicle in the public equity space has also improved attractiveness of private equity as a viable investment route. Key risks to watch Notwithstanding the positive developments and prospects, the Saudi Arabian markets will also face key risks. Actual government spending during the year needs to match the announced allocations. Consumers, at least the Saudi citizens need to respond positively to government s special allowances and incentives by spending, instead of higher savings in the wake of increased fuel and electricity prices. Reduction in expat population post the introduction of expat tax also reduces consumer base. With the US Federal Reserve set to raise rates at least thrice in 218 and beyond, SAMA will follow suit to maintain the peg, thereby raising domestic rates. On the capital market front, large IPOs in rest of GCC are lining up, in addition to Aramco. And from equity markets point of view, any further delay in inclusion of Saudi Arabia in FTSE or MSCI indices, keeps away foreign investors for longer period. An eventful 218 to look forward to Overall, the year 218 promises to be eventful for Saudi Arabian economy, starting with generous government spending after last year s constraints, higher inflation on account of VAT and reforms in electricity and fuel prices to close gap with market rates. At the same time, the adverse impact of price rise on consumption will be partly cushioned by government allowances and support in the form of beneficial policies, made possible by higher crude oil prices. The key risk is that the economy either doesn t respond or responds late. Past data suggests otherwise, and therefore gives hope for a turnaround in the Saudi economy in 218 and stronger performance in capital markets.. SAUDI ARABIA 218 OUTLOOK January 218 P a g e

6 Executive Summary B. Saudi Economic Outlook 218 Factors Negative Neutral Positive Outlook GDP Growth Oil Prices Oil Production Fiscal policy Credit growth Monetary policy Cautiously positive Fiscal Deficit SAUDI ARABIA 218 OUTLOOK January 218 P a g e 6

7 Saudi Economic Outlook 218 Saudi Economic Outlook 218 Saudi Arabia s economy contracted.7% in 217. While the subdued oil prices for most part of the year (average price USD 3/barrel during first nine months of 217) played a part, the curtailed government spending, albeit to control fiscal deficit, possibly played a bigger part. The result was slower economic growth, reflected in several economic indicators (credit growth, inflation, money supply) as well as industry demand indicators (cement sales, house rentals, ATM cash withdrawals, Point-of-Sales transactions). On the positive side, the non-oil sector of the economy recorded positive growth during the year, in spite of overall slowdown, thus indicating the relatively increasing resilience of the segment. In the last quarter of the year, the government significantly stepped up its spending, to the extent that it overshot its full year spending and deficit targets. For 218, the government has announced an expansionary budget with higher spending targeted towards capital expenditure, and generous allowances to its employees. Some of the private sector companies have followed suit, thus increasing the proportion of Saudi residents who will have greater pay in hand. The effect of the higher spending may reflect in the economic indicators with a lag. Nevertheless, Saudi government expects economic growth to revive to 2.7% in 217. The World Bank and International Monetary Fund (IMF) have more subdued growth estimates of 1.2% and 1.13% respectively. We expect that greater government spending and oil prices on the rise will improve both the economic prospects and consumer sentiment for the year 218. Figure 1: Saudi Arabia Annual GDP growth (%) Ministry of Finance, IMF, 1.6 The World Bank, E Ministry of Finance The World Bank IMF Source: General Authority for Statistics, The World Bank, IMF Government spending to play a greater role in reviving the economy in 218 Government spending in 218 is set to increase 2% year-on-year (YoY) to SAR 1,111 bn, the highest ever for Saudi Arabia. The capital expenditure will rise at a high rate of 13.9% to SAR 2 bn. Alongside spending by NDF (SAR billion) and PIF (SAR 83 bn), which is mostly expected to be on specific projects/programs, the total capital expenditure for 218 would equal SAR 338 bn, which is nearly double of budget capital expenditure in 217. We may expect that sectors requiring capital expenditure, such as construction, utilities etc. would benefit from the capacity building investments by the government. In terms of current expenditure (increase of 3.6% to SAR 773 bn), the government appears to continue its path of disciplined expenditure. The new addition to current expenditure is the Citizens Account SAUDI ARABIA 218 OUTLOOK January 218 P a g e 7

8 Saudi Economic Outlook 218 Program which will add SAR 3 bn in 218, but is deemed necessary by the government to minimize the impact of higher fees, levies etc. on the lower and middle income households. Figure 2: Estimated 218 Expenditure vs. 217 Expenditure (SAR bn) E Compensation of Employees Use of Goods and Services Financing Expenses Social Benefits, Subsidies, Grants Other Expenses Non-Financial Assets (Capital) 26. Source: Ministry of Finance, E-Estimate Special Allowances announced in January 218 to put additional money in hands of consumers Saudi Arabia has announced a series of new allowances and tax breaks for state employees, military personnel and some citizens, in order to offset for rising inflation. This is estimated to cost around SAR bn (USD 13 bn) to the state exchequer in 218. These allowances include: a monthly cost of living allowance of SAR 1, for the government staff and military personnel for one year; a monthly allowance of SAR for one year to pensioners and to the beneficiaries of the social security system; SAR, in bonus to military personnel serving in Yemen and also a 1% increase in the stipend paid to students. In addition, the government would be bearing VAT expenses for the citizens using private healthcare and education services and would also pay taxes for first-time homebuyers, which would be capped at SAR 8,. The new allowances have been announced within few weeks of Saudi Arabia s budget for 218, in which allocation to employee compensation had been maintained at nearly same level as in 217. The Minister of Finance Muhammad Al-Jadaan stated that the new allowances announced were complementary to the expenditure budget. This indicates that the funding for the new allowances would most likely be outside the budget. We consider the allowances to improve consumer sentiment, which had been dampened in 217 due to curtailed government spending in first three quarters of the year, as reflected in various economic indicators. Fiscal deficit target for 217 exceeded, and shifted to 218 The fiscal deficit for 217 was SAR 23 bn, higher than full-year target of SAR 198 bn, and exceeding analysts estimates by a wide margin. Considering the slowdown in the economy, partly due to restricted fiscal spending in 9M217, the government appears to have prioritized spending over fiscal targets. The target for 217 appears to have been shifted to 218, with SAR 19 bn deficit aimed next year. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 8

9 Saudi Economic Outlook 218 Figure 3: Annual Fiscal Balance (SAR bn) E Fiscal Balance (SAR bn) - LHS Fiscal Balance (% GDP) - RHS Source: Ministry of Finance, E-Estimate Fiscal Balance Program now extended to 223 The government s Fiscal Balance Program, with the earlier aim of balancing the budget by 22, has been extended to 223, giving the government more room and time to focus on reviving near term economic growth. The change was expected, as even IMF had suggested to the Saudi government about recalibrating the pace of fiscal reforms, so as to allow the economy to adjust to the changes introduced. Accordingly, the government has revised the program with gradual movement to fiscal rebalancing by 223. The fuel price related reforms have been spread out over 218 to 223 period, with only jet fuel, benzene, diesel and electricity price revisions expected in 218. Also, as part of the program, the government has put a cap on debt-to-gdp ratio of 3% and total reserves drawdown to USD 2 bn. Figure 4: Revenue Expenditure and Fiscal deficit estimates till 223 (SAR bn) ,6 99 1, 9 1,8 1,49 1,17 1,138 1, E 219E 22E 221E 222E 223E Revenue (SAR bn) Expenditure (SAR bn) Fiscal Balance (SAR bn) Source: Ministry of Finance, E-Estimate SAUDI ARABIA 218 OUTLOOK January 218 P a g e 9

10 Saudi Economic Outlook 218 C. Equities outlook Factors Negative Neutral Positive Overall Earnings growth trajectory MSCI and FTSE possible inclusion Trading volumes Dividend yield Positive Valuations SAUDI ARABIA 218 OUTLOOK January 218 P a g e 1

11 Equities outlook Equities outlook Saudi equity markets look set to benefit from generous government spending in 218 (assuming it is fully realized), both in terms of project/capital expenditure (beneficiaries construction, cement, capital goods) and current expenditure in the form of special allowances, citizens account program as well as policy changes in housing sector (beneficiaries consumption related sectors such as retail, food and beverages, real estate). The increased possibility of inclusion of Saudi Arabia in MSCI and FTSE indices in 218 will start attracting foreign institutional investments in to Saudi equity markets. A possible IPO of Aramco in second half of 218 will be a landmark event. Performance in 217 The Tadawul All Share Index (TASI) ended flat for 217. The index had a volatile year as evident from the swings in Figure and was lagging 4% year-to-date in October, before rebounding to end the year with a marginal.2% growth. Since 214, when oil prices started to fall, TASI has fallen by 1%, giving an average annual return of -3.7%. Hopefully with oil prices moving up, TASI would follow suit. Figure : TASI monthly movement (index points) Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec Rise in indext Fall in index Source: Tadawul Figure 6: TASI vs Oil Source: Tadawul December 217, Jun-97 Jul-98 Aug-99 Sep- Oct-1 Nov-2 Dec-3 Jan- Feb-6 Mar-7 Apr-8 May-9 Jun-1 Jul-11 Aug-12 Sep-13 Oct-14 Nov-1 Dec-16 Brent - USD/bl (LHS) TASI (RHS) The best performing sectors on TASI were Media, surging by 1%, and Retailing, gaining 14% over 217. Meanwhile, the worst performers were Pharma & Biotech falling by 27% and Consumer services losing 24%. Most of the consumer sectors, barring two were down in 217 owing to controlled government expenditure and salary cuts to public sector employees. These austerity measures, combined with the drop in oil prices that prompted them caused the kingdom s worst economic slowdown since the global financial crisis. Media sector s gain was driven by Saudi research & Marketing Group and Tihama Advertising & Public Relations Co., both gaining more than 7% year-to-date in 217. The decision to reverse the salary and benefits cut for the public sector employees, improved oil prices, and TASI s possible inclusion to FTSE and MSCI indices were the chief reasons for the index to rebound in the latter half of 217. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 11

12 Equities outlook Figure 7: TASI Sector Indices performance 217 (%) Media Retailing Food retail Banks Materials Industry Food & Beverages Insurance Utilities Real Estate Consumer Durables Health Care Capital Goods Energy Industry Telecommunication Commercial Services Diversified Financials Transportation Consumer Services Pharma & Biotech Source: Tadawul Performance vs rest of GCC and global peers TASI performed better than most of its GCC peers, except Kuwait and Bahrain. While oil price volatility played a part in affecting equity market performance, the rise in geopolitical tensions also played a part. Most emerging and developed market peers recorded strong equity market performance in 217, led by improving economic prospects, benign monetary policies and relatively attractive valuations. Figure 8: TASI vs rest of GCC and global peers (217 index performance - %) China (Hong Kong) India Brazil South Korea Indonesia US (S&P) Japan South Africa Taiwan Germany Kuwait GCC Countries France Bahrain Mexico UK Australia China (Shanghai) Saudi Arabia Abu Dhabi Dubai Russia Oman Qatar Source: Ministry of Finance Overall TASI earnings trajectory Growth trend TASI and sector wise earnings for 9M217 TASI earnings were inconsistent for three quarters of 217. Two of the largest sectors on Tadawul index, Materials and Banks PAT, increased 1% and 14% year-on-year respectively for Q In terms of sectors, Energy s year-on-year earnings growth for Q3 217 was the highest at 6%, while Media SAUDI ARABIA 218 OUTLOOK January 218 P a g e 12

13 Equities outlook sector s was turnaround story. Media sector s PAT increased from SAR -69 million to SAR 18 million yearon-year. The year-on-year PAT performance for consumer sectors was mostly muted or negative mirroring the sector s share price performance, mainly due to salary cuts and impending subsidy cuts. Figure 9: TASI PAT and YoY growth (Quarterly) Q3 217 PAT SAR 32.9 bn Q3 217 PAT growth, 18.7% Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Q3 29 Q4 29 Q1 21 Q2 21 Q3 21 Q4 21 Q1 211 Q2 211 Q3 211 Q4 211 Q1 212 Q2 212 Q3 212 Q4 212 Q1 213 Q2 213 Q3 213 Q4 213 Q1 214 Q2 214 Q3 214 Q4 214 Q1 21 Q2 21 Q3 21 Q4 21 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Q () (1) (1) Profit (SAR Bn) -LHS Profit (% yoy) - RHS Source: Reuters Eikon Table 1: Tadawul Sector Earnings Performance (sorted by market cap) Earnings (SAR mn) Market Cap (SAR mn) Q3 217 Q3 216 Q2 217 % YoY % QoQ Materials 7,43 8,72.4 7,98.4 6, Banks 8,26 11, , , Telecommunication Services 17,744 2,39. 1, , Real Estate 18, Utilities 89,143,3.6 4, , Food, Beverage & Tobacco 87,31 1, , Insurance 41, Diversified Financials 36, Energy 31, Health Care 28, Retailing 26, Transportation 13, Consumer Services 13, Capital Goods 9, Commercial Services 7, Food & Staples Retailing 7, Media, Pharmaceuticals 3, Consumer Durables & Apparel 3, Total 1,76,477 32,878 27,687 2, Source: Reuters Eikon, Bloomberg, MCap as of January 21, 218 Expectations in 218 As per Bloomberg analysts consensus estimates, TASI is expected to record 13.7% year on year increase in earnings in 218. The book value per share for TASI in 218 is estimated to increase 4.3%, while dividends are expected to rise 1%. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 13

14 Equities outlook TASI and constituent sector indices valuation TASI s valuation has been flat for 217, with historical price-to-earnings ratio at 16, price-to-book at 1.7 and dividend yield at 3.2%. A flat 217 did have much bearing on TASI s valuation. However, it continues to be valued at a premium compared to rest of GCC valuation. Materials, the largest sector in Tadawul All Share Index, is valued at a slight premium compared to TASI s with P/E of 19.1, P/B of 1.7 and dividend yield of 3.3%. Banking sector, which gained 8.2% in 217, is valued at a P/E of 12.2, P/B of 1. and dividend yield of 4%. Media sector which gained the most in 217 is valued at a P/B of.7. Consumer and Retail sectors are valued at a premium compared to TASI s valuation. Table 2: Tadawul Sector Valuation Table (sorted by market cap) Index M.Cap $ Bn Last Close 217 (%) P/E (TTM) P/B (TTM) D/Y (%) Materials Industry Banks Telecommunication Real Estate Utilities Food & Beverages Insurance Diversified Financials Energy Industry Health Care Retailing Transportation Consumer Services Capital Goods Commercial Services Food retail Media NA.8. Pharma & Biotech Consumer Durables Source: Bloomberg, MCap, PE, PB, Dividend yield as of January 21, 218 Comparison of TASI valuation with rest of GCC markets Saudi Arabia, being the largest market in the GCC region, also has the most investor interest. However, TASI s valuation is relatively higher compared to most of its peers, which is partly explained by its relatively higher earnings growth expectations, and also owing to its larger size of markets among peers. Going forward, the similar pattern is expected to continue as the most of the major factors expected to affect all GCC countries in 218 (VAT and fuel price reforms, interest rate movements due to US Fed rate hike, oil price changes) are of similar nature. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 14

15 Equities outlook Figure 1: TASI vs rest of GCC valuations Saudi Arabia Kuwait Qatar Oman Abu Dhabi Dubai Bahrain PE Div Yield (%) PB Earnings growth (%) - 217E RoE (%) Source: Ministry of Finance; Valuation as of January 1, 218 Overall, the index is still attractively valued compared to historical levels among its peers. On the backdrop of positive macroeconomic and policy action (expansionary government budget, progress on possible inclusion of TASI index in FTSE and MSCI indices), TASI is expected to be an attractive market for investors. Tadawul s total value traded and liquidity Tadawul s monthly stock market turnover has been on the decline for the past five years as can be seen from Figure 11. The fall in oil prices and subsequent drying up of liquidity in the market mainly appear to have resulted in lower investor and trading interest. However, the trend appears to be reversing, although marginally. The average daily traded volume, which also reflects the overall activity level, can be seen in Figure 8 to be distinctively on the decline. However, in 218 till date (January YTD), the average daily turnover has picked up and is above 217 average. We expect the investment and trading interest in 218 to be revived on back of several key economic policy announcements. Figure 11: Stock Market Turnover- monthly (SAR bn) Figure 12: Average daily turnover (SAR bn) Jan-13 Jul-13 Jan-14 Jul-14 Jan-1 Jul-1 Jan-16 Jul-16 Jan-17 Jun-17 Dec * Source: Tadawul, SAMA Source: Tadawul; Note: *-Till January 17, 218 IPO action Since 212, the number of Initial Public Offerings (IPOs) on Tadawul was on a decline, in tandem with lower sentiment following fall of oil prices and lower market activity. However, in 217 Saudi IPO market revived with 17 issuances. Out of the total issuances, nine were on the parallel market NOMU that started in early 217, and seven issuances were of Real Estate Investment Trusts (REITs), leaving only one corporate listing on main Tadawul exchange (Zahrat Al Waha). In 218 so far (as of January 17), there is SAUDI ARABIA 218 OUTLOOK January 218 P a g e 1

16 Equities outlook only one more company with its prospectus filed (AlBaha Investment & Development). However, as the government envisages the economy to revive and private sector companies to play a greater role in economic contribution, the number of companies seeking the public markets route to raise capital/provide exit to private equity investors will rise, thereby leading to a more vibrant IPO market. In 218, the biggest watched IPO will be of Saudi Aramco, expected in second half of the calendar year. Figure 13: Saudi Arabia Initial Public Offerings TASI REITs NOMU Source: Tadawul SAUDI ARAMCO IPO in 2H 218? The mega IPO of Saudi Aramco is expected to occur in the second half of 218. The listing of the world s largest oil company will be a landmark event for Saudi Arabia and equity markets around the world. While the listing was first talked about in 216, it is only now that related activities have started to pick up. As of January 1, 218, the company was constituted as a joint stock company, with a corporate structure including a Board of Directors as the governing body. The listing will be most likely a dual listing with the local portion being on Tadawul and the international one on one of the three developed market exchanges of New York, London and Hong Kong. Further, bankers will be finalized in the coming months and roadshows will begin. NOMU has been underwhelming, but could be here to stay Another feature of 217 was the start of parallel market NOMU, which witnessed 9 listings. The platform was started to encourage small and medium enterprises to list with easier listing norms than those of Tadawul. The platform provides an opportunity for private equity investors to use the public listing route to exit their investments. However, the performance of stocks on NOMU has been underwhelming. The NOMU index recorded a nearly % drop by end of the year, which will weigh on the mind of potential corporates aiming for listing as well as potential investors in IPOs. Further, trading volumes on NOMU has been lesser than expected. We expect CMA or another government body to further promote NOMU by some form of market making incentive mechanism. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 16

17 Equities outlook REITs take the spotlight The listings of Real Estate Investment Trusts (REITs) were in vogue in 217, with as many as seven listings in 217 and another one in January 218, with total size of funds SAR.1 bn. There are seven more REITs in the wings waiting for their listing turn, with total size SAR 7.4 bn. Table 3: REITs listed in 217 and 218 (Till January 24, 218) REIT Listing date Fund Size (SAR mn) Al Ahli REIT (1) Jan. 8, Musharaka REIT Oct. 2, Mulkia REIT Nov., * Jadwa REIT AlHaramain April 3, AlMa'athar REIT Aug. 22, Al Masha ar REIT Jan. 18, Riyadh REIT Nov. 13, 216 Taleem REIT May 3, AlJazira Mawten REIT Feb. 1, Source: Argaam.com; *Acquired a property on Jan. 8 thereby increasing fund size to SAR 677 million from SAR 6 million. Table 4: REITs in the pipeline to be listed (status as on January 24, 218) REIT Status Fund Size (SAR mn) Al Rajhi REIT Open for subscription Jadwa REIT Saudi Subscription Closed 18 Derayah REIT Subscription Closed 1172 Wasatah REIT Open for subscription 18 AlNefaie Umm Alqura REIT Fund Open for subscription 692 SEDCO Capital REIT Not listed yet 6 Source: Argaam.com; Swicorp Wabel REIT was not included for lack of information. The total SAR 12. bn funds either listed or to be listed have investments across a range of properties spanning residential, commercial, office, warehousing and other end-uses. These funds have total 81 fully-developed properties, two usufructs, and three real estate projects under development. Table : REITs with the underlying properties held REIT Property Segment Number of Assets Al Rajhi REIT Derayah REIT AlMa'athar REIT Commercial, offices, educational, warehouses Residential, offices, stores, warehouses and hospitality Office, warehouses, residential, stores 13 fully developed and owned properties 12 fully developed and owned, 2 usufructs, 1 under development 11 fully developed and owned, 1 under development SEDCO Capital REIT Hotels, commercial, offices, residential 7 fully developed and owned Riyadh REIT Mulkia REIT Musharaka REIT Jadwa REIT Saudi AlNefaie Umm Alqura REIT Fund Offices, hospitality and hotels, stores 6 fully developed and owned, 1 under development Residential, industrial, offices, stores 4 fully developed and owned, 1 fully developed, 76% owned * Residential, warehouses, hospitality and fully developed and owned hotels Residential, commercial, warehouses, educational fully developed and owned Hotels, commercial 4 fully developed and owned Al Masha ar REIT Hospitality and hotels, stores 3 fully developed and owned SAUDI ARABIA 218 OUTLOOK January 218 P a g e 17

18 Equities outlook REIT Property Segment Number of Assets Wasatah REIT Hotels 2 fully developed and owned Jadwa Reit AlHaramain Fund Hospitality and hotels, stores 4 fully developed and owned *** Al-Ahli REIT (1) Hospitality and hotels, stores 2 fully developed and owned AlJazira Mawten REIT Warehouses 1 fully developed and owned (Contains 6 warehouses) Taleem REIT Educational 1 fully developed and owned Source: Argaam.com; * Acquired 76% of a property in Riyadh post listing; ** Acquired a property in Riyadh post listing; *** acquired two properties in Makkah post listing. Possible inclusion of TASI in FTSE and MSCI benchmark indices draws near One of the major landmark events for Saudi Arabian equity market to look forward to in 218 would be possible inclusion in FTSE and MSCI Emerging Market benchmark indices. The formal inclusion in these indices would lead to global asset management firms to increase their exposure to Saudi Arabian equities in order to align their portfolios to these benchmarks. While the possible inclusion of Saudi Arabia in the benchmark indices has been on the cards since 21, it is only now that the developments are accelerating towards actual inclusion. In case of FTSE indices, during its review in September 217 country classification annual review, the index provider refrained from adding Saudi Arabia, while also expecting that it expects the country to soon meet the criteria to be promoted from unclassified status to secondary emerging market. The next review is due in March 218. The inclusion of Saudi Arabia is expected to lead to passive fund inflows, presuming Saudi Arabia has 2.7% weight in the index, as per analyst estimates. The estimated weight is excluding possible Aramco listing, which could increase Saudi Arabia s weight in the index to close to %. With respect to MSCI, in June 217, Saudi Arabia was added to its watch list for a potential upgrade in June 218. If the upgrade materializes, the actual inclusion of Saudi Arabia in the MSCI Emerging Market Index would happen in two phases in May 219 and August 219. The inclusion of Saudi Arabia is expected to lead to active fund inflows in to its equity market up to an estimated USD 9 bn, presuming Saudi Arabia has 2.4% weight in the index, as per MSCI indications. The weight would be distributed across 32 Saudi stocks, excluding Aramco. With Aramco, Saudi Arabia s weightage would nearly double to close to % in the benchmark index. Saudi Arabia has been vying for inclusion in benchmark indices since 21, as part of larger plan of diversification of the economy and ensuring a vibrant capital market as a key feature of the economy. It has taken a series of steps to pursue its goals. The market was opened to Qualified Financial Investors (QFIs) to directly take stake in listed equities, in 21. The permitted stake, in individual companies and in the market as whole, has been gradually increased. The qualification criteria, such as minimum Assets under Management (AUM), have also been progressively relaxed. QFIs have been now allowed to participate in IPOs. While QFIs have been allowed to take stakes in Saudi Arabian listed companies up to 49% of equity, the actual percentage holding has been quite low so far. The inclusion in benchmark indices would lead to net inflows of funds in to Saudi equities, similar to the inflows witnessed in case of UAE and Qatar at the time of their inclusion in benchmark indices. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 18

19 Equities outlook D. Real Estate Sector Outlook Factors Negative Neutral Positive Overall Demand Supply Balance Occupancy levels Rent growth Economic Outlook Government support Demographic demand drivers Long term Positive SAUDI ARABIA 218 OUTLOOK January 218 P a g e 19

20 Real Estate Sector Outlook Real Estate Sector Outlook Saudi Real Estate sector witnessed the government s renewed focus on affordable housing and policy coordination in 217. Multiple official agencies Saudi Arabian Monetary Authority (SAMA), Real Estate Development Fund (REDF) announced policies and measures encouraging home ownership. A new entity - Saudi Real Estate Refinance Company (SRC) was formed by Public Investment Fund (PIF) to support the real estate sector. The past year also witnessed a growing trend of listing of Real Estate Investment Trusts (REITs), especially towards second half of 217, which appears to continue in 218 as well. Overall, multiple agencies appear to work towards the goals of National Transformation Program 22, under which the government plans to increase Saudi home ownership to 2% from 47% earlier. More such coordinated action by multiple government agencies may be expected in 218. The construction and infrastructure sectors also appear set for more activity in 218, due to large capital allocation by the government in the budget. Credit from banks to real estate and GDP growth Credit loan to real estate sector grew 8.7% YoY to SAR219.9 bn in Q3 217 with retail credit growing 7.% YoY to SAR117.7 bn and corporate credit rose 1.% YoY to SAR12.1 bn. The proportion of retail credit in total real estate loan declined to 3.6% in Q3 217 from 6.3% in 211 while corporate loan accounts for 46.% in Q3 217, higher than 39.7% in 211. With increase in real GDP over the past 7 years, the proportion of total real estate loan from bank has also raised to 8.% in Q3 217 of overall total bank loans as compared to just 3.% in 21. Figure 14: Real estate loans by banks Figure 1: Proportion of loans grew with GDP 1% 8% 6% 4% 2% % M 217 Retail Corporate M Real GDP (SAR bn) 217 Loans/GDP 9% 8% 7% 6% % 4% 3% 2% 1% %, IMF October 217 report Moreover, Saudi central bank introduced various measures to support mortgage financing. Under its National Transformation Program 22, the government plans to increase Saudi home ownership to 2% from 47% earlier, and also aims to increase the percentage of real estate financing to non-oil GDP to 1% from 8%. The Saudi Arabian Monetary Authority (Sama) plans to exempt administrative fees to mortgage holders when they switch between floating loan rate to fixed loan rates. Furthermore, SAMA stated Mortgage holders can also move from one mortgage lender to another at no extra cost. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 2

21 Real Estate Sector Outlook Favorable demographics form the base for demand Saudi Arabia s working population increased at a CAGR of 3.4% from 21 to 217, faster than the Kingdom s total population (CAGR of 2.7%). Moreover, people less than 2 years of age represent 4% of the aggregate population, indicating continued demand for housing. Rising income, urbanization, and increasing nuclear families are expected to support the demand for the real estate sector in the long term. The Saudi population is highly skewed toward Riyadh, Jeddah, and Makkah, with more than % of the total population situated here. Riyadh and Jeddah have a large population mainly due to intense business and political activity, while Makkah and Madinah are popular tourist destinations. These regions present an attractive opportunity for real estate sector to further flourish in the coming years. Figure 16: Saudi population age group wise (million) E 219E 22E 221E 222E 223E 224E 22E Source: The World Bank Saudi Arabia regulations and reforms support the demand While there exists a secular demand for residential/housing units, the demand supply mismatch has required Saudi Arabian government to intervene in the form of regulations to boost demand/encourage supply. These measures vary from imposing of tax on vacant land to establishment of specialized credit institutions supporting the financing of real estate. White Land Tax White Land tax was introduced in 21 and regulations were released in June 216. White land is defined as any idle land designated for residential or residential/commercial use within urban boundaries. The regulation is aimed at addressing the housing shortage in urban areas. According to JLL, the tax would be imposed on the following four phases:- Phase 1: Undeveloped land with area exceeding 1, sq m. Phase 2: Developed land with area exceeding 1, sq m. Phase 3: Developed land with area exceeding, sq m from one plan Phase 4: Developed land with area collectively exceeding 1, from one city The Saudi government introduced the first phase by imposing 2.% land tax on undeveloped urban land larger than 1, sq. m planned for residential use in areas such as Riyadh, Jeddah, and Makkah. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 21

22 Real Estate Sector Outlook Landowners are required to pay the fees within one year of being issued the tax invoice. Moreover, the housing ministry is expected to impose white land tax on commercial areas in the near future. Revenue generated from white land tax would be utilized to fund the Ministry of Housings projects. However, the second phase of white land tax would not be introduced before 22. Saudi Real Estate Refinance Company In October 217, the Public Investment Fund (PIF) announced the establishment of the Saudi Real Estate Refinance Company (SRC) to boost the real estate market, increase its contribution to the GDP, and raise the rate of ownership among Saudi nationals from 47% in 217 to 2% by the end of 22. The demand for real estate financing in the Kingdom is expected to increase from SAR28 bn in 217 to SAR bn by 226. SRC was launched in partnership with the Ministry of Housing and is expected to refinance up to SAR 7 bn for the housing sector over the next five years, reaching SAR17 bn by 226. Off-plan Sales Saudi Arabia, in 216, lifted the ban it had introduced in 29 on the purchase of properties that are in the planning stage and permitted real estate developers to sell off-plan units. Strict measures were put in place by the ministry for such transactions. Down payments should be made by a check or bank transfer to escrow accounts, and cannot exceed 2% of the unit s cost. Saudi Arabia mandated that developers must guarantee structural and insulation works for buildings for at least 1 years from the property s completion date, in addition to the guarantee of at least a year for electrical and mechanical works. Developers were also directed to pay % of the unit s value if they fail to deliver the property for 12 months or more. Wafi, Saudi Arabia s electronic program set up by the housing ministry, recorded around SAR6 bn in off-plan sales with the number of applicants from Al Madinah amounting to 4,2 in October 217. Going forward, the majority of the new projects are expected to be delivered by the Ministry of Housing focus on off-plan sales basis to increase residential flat affordability. By selling off-plan units, developers receive direct payments from buyers, dispensing the need for interest-laden loans from banks, expected to reflect in unit prices. Saudi Arabia: View on key real estate markets Saudi Arabia s key real estate markets span Riyadh, Jeddah, Dammam, Madinah and across segments of office space, retail and residential. Demand was subdued in 217 due to overall economic slowdown. Especially in case of office segment, additional supply is expected to cause more vacancies and lower rents. The residential market is facing a mixed impact on demand because of expat exits as well as push on affordable housing. Retail real estate demand is relatively resilient and can benefit from government s spending towards special allowance and generally expansionary budget. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 22

23 Real Estate Sector Outlook Table 6: Saudi Arabia Real Estate Market Outlook 218 Office Market Residential Market Retail Market Higher supply would The number of new Supply would grow 1.6% continue to outpace projects in 218 would be YoY to 4. mn sq. m. in 218 subdued demand in 218. limited due to continued in Riyadh, Jeddah, and the Total supply would grow departure of expatriates DMA region (combined). Demand/Supply 1.% YoY to 6.7 mn sq. m. in 218 in Riyadh, Jeddah, and increased charges on dependents. However, the Demand for retail space would improve due to the and DMA (combined). affordable housing sector anticipated rise in would witness more activity spending. in terms of government incentives. Total supply would grow 2.2% YoY in 218 to 2.4 mn sq. m. units in Riyadh, Jeddah, and the DMA region (combined). Vacancies are likely to increase further in 218 on The vacancy rates would recover slightly, mainly in Vacancy rates are likely to increase due to higher Occupancy Rates higher supply and weak demand. the apartments market due to a shift in focus from villas. supply. However, an increase in demand mainly shopping malls would partially offset higher supply. Rents would continue to Rents would remain stable Rents Rents would continue to deteriorate in 218. slow down in the near term. However, increasing activity in the affordable due to more uptake of retail space in the near term. market would provide some cushion. Source: JLL reports. Public Private Partnerships: New financing tool for infrastructure projects In the infrastructure sector, public-private partnerships (PPPs) provide investors the opportunity to access parts of the market once available only to the public sector. The demand for reforming infrastructure across Saudi Arabia has increased, providing considerable incentive to attract more private sector involvement and, in turn, investment. With the government now determined to shift from oil dependency and introduce the National Transformation Program (NTP) and the Saudi Vision 23, the PPP model provides an important framework for international and regional investors and developers to tap into a wide range of opportunities in the housing, education, and healthcare sectors of the Kingdom. The PPP model largely contributes to Saudi Arabia s Vision 23 aimed at increasing the share of private sector investment in the country s GDP from 4% in 216 to 6% in 22. Moreover, the plan intends to increase the contribution of real estate partnerships from the current level of % to 1% by 22. According to MEED Projects, Saudi Arabia has the highest value of PPPs in the region, with 18 projects with total value of USD42.9 billion announced as of September 217. These investments are bifurcated SAUDI ARABIA 218 OUTLOOK January 218 P a g e 23

24 Real Estate Sector Outlook mostly into housing (4%) and transport sectors (37%). However, this is likely to change with the extensive use of the PPP model in the aviation, housing, education, and healthcare sectors over the next five years as the Saudi Arabian General Investment Authority (SAGIA) stated it would privatize parts of these sectors. Figure 17: Value of PPP projects Figure 18: PPP Sector contribution USD bn KSA Libya Kuwait Morocco UAE Iran Bahrain Tunisia Iraq Egypt Oman Jordan Qatar 11% 26% 2% % 2% Housing USD 42.9 bn 4% Transport Airports Utilities Education Healthcare Source: MEED Projects * IWPPs and IPPs are excluded, JLL Source: MEED Projects * IWPPs and IPPs are excluded, JLL The legal and regulatory frameworks in Saudi Arabia continue to evolve and develop to provide an environment that would encourage and facilitate the use of the PPP model. There are some challenges to overcome, but significant progress was made in the last 18 months. The public and private sectors show substantial interest in PPPs. The developing phase of the legislative structure did not discourage early investors and developers from entering the PPP market to explore potential opportunities in real estate, but some concrete steps would be needed in the near future to maintain the momentum. Construction sector expected to recovery in 218 Saudi Arabia s construction sector is stagnating due to low public spending on projects, but is expected to recover in 218. In 216, revenue from the construction sector declined to SAR19.64 bn. The economic slowdown and the government's delay in payments to contractors negatively impacted the sector and pushed some companies out of the market. Although several projects were executed over the last few months, the sector remains sluggish compared with that in the previous years. Figure 19: Construction industry value and Real Growth SAR bn E 218E 219E 22E 221E 222E 223E 224E 22E 226E Construction industry value Construction industry value real growth 9.% 7.%.% 3.% 1.% -1.% -3.% -.%, BMI The construction sector continued to gradually grow in 217 as it began to recover from an expected contraction in 216. According to Faithful+Gould's report, contract awards remained flat at USD22 bn in SAUDI ARABIA 218 OUTLOOK January 218 P a g e 24

25 Real Estate Sector Outlook 217 compared with that in the previous year. However, contract awards gathered pace in 2H 217. In 218, the sector is expected to grow at 3.%, as a result of increased government expenditure. Project implementation would continue to recover and reach previous growth peak of 7.6% in 22. Real Estate Market Summary View The Saudi real estate market s performance remained subdued in 216 and 217 due to weak economic conditions with negative sentiment further impacting activity levels and sales prices. Occupancy levels had a negative impact across most asset classes, leading to reduction in rent. However, we believe the current situation is short term and the market is reaching the bottom of the cycle. The government is undertaking various initiatives to stimulate the real estate sector and encouraging the private sector to play a key role in the process. Saudi Arabia s focus on diversification to the non-oil sector is defined by the Saudi Vision 23 and the National Transformation Plan. Thus, recovery in GDP in the coming years and the government s aim to increase non-oil sector growth are expected to support the real estate market in the coming years. However, oil prices, regional tension, and the extent to which reforms impact the economy would pose as downside risks in the recovery of the economy and real estate sector. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 2

26 Real Estate Sector Outlook E. Private Equity Outlook Factors Negative Neutral Positive Number of funds Deal activity Exit via NOMU Demand for private capital Long term positive SAUDI ARABIA 218 OUTLOOK January 218 P a g e 26

27 Private Equity Outlook Private Equity Outlook Saudi Private Equity space is also gaining traction along with rest of economy. While the government is encouraging small and medium enterprises by having Public Investment Fund (PIF) earmark part of their investment for such enterprises, private equity investors are also increasing fund raising and seeking investment deals in specific sectors - such as consumption, healthcare, education which have long term demographic drivers and appear relatively insulated from the fluctuations in oil prices and changes in fiscal policy. Valuations have also become more attractive with the fall in public equity markets. On the backdrop of Saudi Vision 23, which envisages a greater role for private companies contribution to economy, the need for capital by such companies will provide opportunities for private equity investors. The availability of NOMU as an exit vehicle in the public equity space has also improved attractiveness of private equity as a viable investment route. Private Equity Funds Assets under management Private Equity as an investment asset class is attractive to investors for several reasons such as comparatively higher returns, better visibility on assets through greater access to managements and better forecasting capabilities than public equities. As a result, the asset values of private equity funds as well as number of subscribers have grown steadily over the years. Figure 2: PE Fund Assets and No. of subscribers (SAR bn) H1 213 H2 213 H1 214 H2 214 H1 21 Q3 21 Q4 21 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 Q Asset Value (SAR bn) - LHS No. of subscribers - RHS Source: CMA Although the no. of PE funds have remained more or less steady after the considerable decline in 21, asset value of PE funds has continued to witness sharp growth (except for a small QoQ decline in Q3 217), with a CAGR of around 6% over , reaching SAR 76 bn in Q Number of subscribers has also increased from 723 in H1 213 to 131 in Q SAUDI ARABIA 218 OUTLOOK January 218 P a g e 27

28 Private Equity Outlook Figure 21: Breakup of sector focused funds, KSA Others 23% Healthcare 3% Education 12% Food & Beverages 9% Industrials 21% Source: CMA, based on 66 sample funds Based on the sample of 66 currently active PE funds, just over half of them (34) are sector focused, with the predominant sector being Healthcare, followed by Industrials, Food & Beverages and Education Sector. Average term of these funds is 7.8 years, while average term extension is 2.2 years. 14 of the 66 funds are foreign-based, while the rest 2 are local. Private Equity Deals Private Equity deals space in Saudi Arabia is relatively smaller as compared to its GCC peers, both in terms of value and volume (number of deals), with only about 36 disclosed deals closed in last five years (212 17). In 216, 63% of the value invested in PE firms went to those in UAE, with Saudi Arabia having 9% of the share. UAE also led in terms of deal volumes that year, accounting for 34% of the deals while Saudi Arabia accounted for 8% of those. Typical private equity deals in Saudi Arabia are structured as acquisitions of controlling interests or 1% acquisitions, although there have been instances of acquisition of significant minority interest. Private equity deals to acquire listed companies are very rare. The prominent target sectors for the deals have been Retail, Financial Services, Healthcare, Education, and Food & Beverages. Figure 22: Key PE Deals : Top Sectors Retail Financial Services Health Care Education Food and Beverages 3 Consumer Goods 2 Real Estate Source: Capital IQ, Thomson Reuters Private Equity Exit: NOMU Parallel Market The Saudi Stock Exchange Tadawul launched the NOMU parallel market in February 217, listing nine Saudi companies out 77 that applied. NOMU is an alternative equity market with lighter listing SAUDI ARABIA 218 OUTLOOK January 218 P a g e 28

29 Private Equity Outlook requirements than the main market. It would function as an alternative platform for private companies to go public, while investment in this market is restricted to qualified investors only. Due to lighter listing requirements, NOMU can be an attractive exit route for private equity firms to offload their invested stake and generate returns. Table 7: Key Differences between Main Market and NOMU Criteria Main Market NOMU Minimum Market Cap SAR 1 mn SAR 1 mn Public Shareholders At least 2 At least 3 Continuous Obligations Disclosure of quarterly financial statements within 3 calendar days from the end of the period and year-end financial statements within 9 calendar days from the end of the period. Disclosure of quarterly financial statements within 4 calendar days from the end of the period and year-end financial statements within 9 calendar days from the end of the period Daily Fluctuation Limits ±1% ±2% Source: Tadawul Risk: NOMU Parallel market Index has fallen 49% since its inception last year, indicating significantly poor performance of the underlying stocks in the market, as compared to the main market. Due to this, investors may be wary of investing in IPO s of companies listing in NOMU. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 29

30 Private Equity Outlook F. Conclusion Overall, the year 218 promises to be eventful for Saudi Arabian economy, starting with generous government spending after last year s constraints, higher inflation on account of VAT and reforms in electricity and fuel prices to close gap with market rates. At the same time, the adverse impact of price rise on consumption will be cushioned by government allowances and support in the form of beneficial policies. The key risk is that the economy either doesn t respond or responds late. Past data suggests otherwise, and therefore gives hope for a turnaround in the Saudi economy in 218. SAUDI ARABIA 218 OUTLOOK January 218 P a g e 3

31 Private Equity Outlook G. Annexure 1: Chart Pack SAUDI ARABIA 218 OUTLOOK January 218 P a g e 31

32 Annexure 1: Chart Pack Annexure 1: Chart Pack I. Macroeconomic Indicators Figure 23: GDP (Constant prices) growth (quarterly -% YoY) Source: General Authority of Statistics Figure 2: Non-oil GDP growth (quarterly - % YoY) Source: General Authority of Statistics Figure 27: Inflation (% YoY) () () Jan-12 Q1 211 Q1 211 May-12 Q3 211 Q3 211 Sep-12 Jan-13 Q1 212 Q1 212 May-13 Q3 212 Q3 212 Sep-13 Q1 213 Q1 213 Jan-14 Source: Saudi Arabia Monetary Authority (SAMA) Figure 29: PMI index Q3 213 Q3 213 May-14 Sep-14 Q1 214 Q1 214 Jan-1 Q3 214 Q3 214 May-1 Q1 21 Q1 21 Sep-1 Q3 21 Q3 21 Jan-16 May-16 Q1 216 Q1 216 Sep-16 Q3 216 Q3 216 Jan-17 Q3 217, -.4% Q1 217 Q3 217 Q3 217, 3.7% Q1 217 Q3 217 November 217,.1% May-17 Sep-17 Figure 24: GDP growth (annual - % YoY) Source: General Authority of Statistics Figure 26: Non-oil GDP growth (annual - % YoY) Source: General Authority of Statistics Figure 28: Food inflation (% YoY) Jan May Sep Jan May Sep Jan May Sep Jan May-1 Figure 3: Cement Sales (Mn tons) Sep Jan May , -.7% , 1.% 216 November 217, -.8% Sep-16 Jan May-14 Aug-14 Nov-14 Feb-1 Source: Bloomberg May-1 Aug-1 Nov-1 Feb-16 May-16 Aug-16 Nov-16 Feb-17 December 217, 7.3 May-17 Aug-17 Nov Jan Feb Mar Source: Bloomberg Apr May Jun Jul Aug Sep Oct Nov Dec SAUDI ARABIA 218 OUTLOOK January 218 P a g e 32

33 Annexure 1: Chart Pack Figure 31: Oil vs Non-oil revenues (% share) 1% 8% 6% 4% 2% % E Oil revenues Non-oil revenues Source: Saudi Arabia Finance Ministry, E- Estimate Figure 32: Annual fiscal balance (SAR bn) E Fiscal Balance (SAR bn) - LHS Fiscal Balance (% GDP) - RHS Source: Saudi Arabia Finance Ministry, E-Estimate Figure 33: Current account balance - quarter (USD bn) Figure 34: Current account balance -yearly (USD bn) Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 21 Q3 21 Q1 216 Q3 216 Q3 217, 1. Q1 217 Q Figure 3: Current Account Balance (%GDP) Figure 36: Trade balance (SAR bn) Q3 217, Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 21 Q3 21 Q1 216 Q3 216 Q1 217 Q Figure 37: Trade balance change (% YoY) Figure 38: KSA breakeven oil price (USD/bl) % F Breakeven oil prices (USD) Average brent price (USD) Source: Ministry of Finance, Thomson Reuters, MEFIC estimate SAUDI ARABIA 218 OUTLOOK January 218 P a g e 33

34 Annexure 1: Chart Pack Figure 39: Total External Debt (SAR bn) Figure 4: SAMA Reserve Assets* (USD bn) Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-1 Jul-1 Jan-16 Aug-16 November 217, 494 Feb-17 Aug-17,*- includes special drawing rights Figure 41: Reserve Assets (% MoM) Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-1 Jul-1 Jan-16 Aug-16 November 217,.2 Feb-17 Aug-17 Figure 42: Bank credit growth (% YoY) Jan-98 Apr-99 Jul- Oct-1 Jan-3 Apr-4 Jul- Oct-6 Jan-8 Apr-9 Jul-1 Oct-11 Jan-13 Apr-14 Jul-1 November 217, -1. Oct-16 Figure 43: Bank credit across major sectors (SAR bn) Figure 44: Bank Deposits (SAR bn) Q Q Q Q Q1 21 Q2 22 Q3 23 Q4 24 Q1 26 Q2 27 Q3 28 Q4 29 Q1 211 Q2 212 Q3 213 Q4 214 Q1 216 Q2 217 Manufacturing and Processing Buiding and Construction Commerce Services 2, 1, 1, Jan-93 Jan-9 Jan-97 Jan-99 Jan-1 Jan-3 Jan- Jan-7 Jan-9 Jan-11 Jan-13 Jan-1 November 217, 1,99.6 Jan-17 Figure 4: Loan-to-Deposit Ratio (%) Figure 46: NPL-to-Total Loans (%) Jan-93 Jan-9 Jan-97 Jan-99 Jan-1 Jan-3 Jan- Jan-7 Jan-9 Jan-11 Jan-13 Jan-1 November 217, 87.9 Jan Q1 29 Q4 29 Q3 21 Q2 211 Q1 212 Q4 212 Q3 213 Q2 214 Q1 21 Q4 21 Q3 216 Q3 217, 1. Q2 217 SAUDI ARABIA 218 OUTLOOK January 218 P a g e 34

35 Annexure 1: Chart Pack Figure 47: Money Supply/M3 growth (% YoY) Figure 48: Composition of M3 money supply (% share) Jan-94 Jan-96 Jan-98 Jan- Jan-2 Jan-4 Jan-6 Jan-8 Jan-1 Jan-12 Jan-14 November 217, -1.4 Jan Jan-93 Jun-94 Nov-9 Apr-97 Sep-98 Mar- Aug-1 Jan-3 Jun-4 Nov- Currency Outside bank Time and Savings Deposits May-7 Oct-8 Mar-1 Aug-11 Feb-13 Jul-14 Dec-1 May-17 Demand Deposits Other Quasi Money Deposits Figure 49: Currency Outside Banks (% share of M3) Jan-93 Jun-94 Nov-9 Apr-97 Sep-98 Feb- Jul-1 Dec-2 May-4 Oct- Mar-7 Aug-8 Jan-1 Jun-11 Nov-12 Apr-14 November 217, 9.6 Sep-1 Feb-17 Figure : Time & Savings Deposits/Total Deposits (%) Jan-93 Jul-94 Jan-96 Jul-97 Feb-99 Aug- Feb-2 Sep-3 Mar- Sep-6 Apr-8 Oct-9 Apr-11 Oct-12 May-14 Nov-1 May-17 Figure 1: 3M SIBOR (%) Figure 2: Short term interest rate curve (1w to 2 w) Jan-27 Sep-27 May-28 Jan-29 Sep-29 May-21 Jan-211 Sep-211 May-212 Jan-213 Sep-213 May-214 Jan-21 Sep-21 May-216 November 217, 1.81 Jan-217 Sep M 3M Dec-216 6M Dec M Figure 3: Inflation (major sub-indices) Figure 4: House Rent Index (1=27) Jan-12 Sep-12 May-13 Jan-14 Sep-14 Food and beverages May-1 Jan-16 Sep-16 Transport Housing, Water, Electricity, Gas, and other fuels November 217 May Q1 214 Q2 214 Q3 214 Q4 214 Q1 21 Q2 21 Q3 21 Q4 21 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Source: General Authority for Statistics SAUDI ARABIA 218 OUTLOOK January 218 P a g e 3

36 Annexure 1: Chart Pack Figure : ATM Cash Withdrawals (SAR bn) Figure 6: Saudi unemployment rate (%) Jul-96 Oct-97 Jan-99 Apr- Jul-1 Oct-2 Jan-4 Apr- Jul-6 Oct-7 Jan-9 Apr-1 Jul-11 Oct-12 Jan-14 Apr-1 November 217, 8.6 Jul-16 Oct Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 21 Q3 21 Q1 216 Q3 216 Q3 217, 12.8 Q1 217 Q3 217 Source: Bloomberg Figure 7: Competitiveness ranking/indicator Figure 8: FDI (accumulated, SAR billions) United Arab Qatar 29 Saudi Arabia Kuwait Bahrain Oman Source: World Economic Forum ( ) Figure 9: External debt-to-gdp (%) Figure 6: POS Transactions Sales (SAR bn) , 18% 2 1 November 217, Jan-9 Jun-96 Nov-97 Apr-99 Sep- Feb-2 Jul-3 Dec-4 May-6 Oct-7 Mar-9 Aug-1 Jan-12 Jun-13 Nov-14 Apr-16 Sep-17 Source: International Monetary Fund Figure 61: Mobile/Telecom Subscribers (mn) Figure 62: Automobile Sales ( s) 2 1 November 217, , Jan-9 Jun-96 Nov-97 Apr-99 Sep- Feb-2 Jul-3 Dec-4 May-6 Oct-7 Mar-9 Aug-1 Jan-12 Jun-13 Nov-14 Apr-16 Sep Source: Ministry of Communication and IT, Q3 216 taken as average of Q2 and Q4 216 Source: Car Sales Base SAUDI ARABIA 218 OUTLOOK January 218 P a g e 36

37 Annexure 1: Chart Pack Figure 63: Electricity Generation (TWh) Figure 64: Electricity Generation - Quarterly (TWh) Q1 21 Q2 21 Q3 21 Q4 21 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Source: Electricity and Cogeneration Regulatory Authority Source: Saudi Electric Company Figure 6: Cement Prices (SAR, kg) Figure 66: Steel Prices (SAR/ton) 16 6, November 217, 13.,8 4,8 3,8 November 217, 2, ,8 11 1,8 1 8 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-1 Sep-1 May-16 Jan-17 Sep-17 Jan-7 Sep-7 May-8 Jan-9 Sep-9 May-1 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-1 Sep-1 May-16 Jan-17 Sep-17 Source: General Authority of Statistics Source: General Authority of Statistics Figure 67: Expat Remittances (SAR bn) November Jan-9 Jan-97 Jan-99 Jan-1 Jan-3 Jan- Jan-7 Jan-9 Jan-11 Jan-13 Jan-1 Jan-17 SAUDI ARABIA 218 OUTLOOK January 218 P a g e 37

38 Annexure 1: Chart Pack II. Oil Indicators Figure 68: Saudi Oil Production (mbpd) December 217, 9.9 Dec-7 Aug-73 Apr-76 Dec-78 Aug-81 Apr-84 Dec-86 Aug-89 Apr-92 Dec-94 Aug-97 Apr- Dec-2 Aug- Apr-8 Dec-1 Aug-13 Apr-16 Figure 69: Saudi Domestic Consumption (mbpd) June 216, Source: Bloomberg Source: Reuters Datastream Figure 7: Saudi Oil Export (mbpd) October 217, 6.9 Jan-2 Oct-2 Jul-3 Apr-4 Jan- Oct- Jul-6 Apr-7 Jan-8 Oct-8 Jul-9 Apr-1 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-1 Apr-16 Jan-17 Oct-17 Figure 71: OPEC Oil Production (mbpd) November 217, 32. Dec-87 Aug-89 Apr-91 Dec-92 Aug-94 Apr-96 Dec-97 Aug-99 Apr-1 Dec-2 Aug-4 Apr-6 Dec-7 Aug-9 Apr-11 Dec-12 Aug-14 Apr-16 Source: Ministry of Petroleum, JODI, Source: Bloomberg Figure 72: Global Oil Supply/Demand (mbpd) Mar-9 Jul-96 Nov-97 Mar-99 Jul- Nov-1 Mar-3 Jul-4 Nov- Mar-7 Jul-8 Nov-9 Mar-11 Jul-12 Nov-13 November 217, 1. Mar-1 Jul-16 Nov-17 Figure 73: US Oil Production (mbpd) November 217, 9.68 Jan-97 Mar-98 May-99 Jul- Sep-1 Nov-2 Jan-4 Mar- May-6 Jul-7 Sep-8 Nov-9 Jan-11 Mar-12 May-13 Jul-14 Sep-1 Nov-16 Source: Bloomberg Source: Bloomberg Figure 74: US Oil Inventory (mb) Aug-82 Sep-84 Oct-86 Nov-88 Dec-9 Jan-93 Feb-9 Mar-97 Apr-99 May-1 Jun-3 Jul- Aug-7 Sep-9 November 217, 43.7 Oct-11 Nov-13 Dec-1 Figure 7: US Rig Count Jul-87 May-89 Mar-91 Jan-93 Nov-94 Sep-96 Jul-98 May- Mar-2 Jan-4 Nov- Sep-7 Jul-9 May-11 Mar-13 December 217, 747 Jan-1 Nov-16 Source: Reuters Eikon Source: Bloomberg SAUDI ARABIA 218 OUTLOOK January 218 P a g e 38

39 Annexure 1: Chart Pack III. Stock Market Indicators Figure 76: TASI and Oil 1 1 Jun-97 Nov-98 Apr- Sep-1 Feb-3 Source: Bloomberg Jul-4 Dec- May-7 Oct-8 Brent - USD/bl (LHS) Mar-1 Aug-11 Jan-13 December 217, Jun-14 Nov Apr-17 TASI (RHS) Figure 77: TASI Price-to-Earnings Ratio (x) Aug- May-6 Feb-7 Nov-7 Aug-8 May-9, Tadawul Feb-1 Nov-1 Aug-11 May-12 Feb-13 Nov-13 Aug-14 May-1 Feb-16 December 217, 1.4 Nov-16 Aug-17 Figure 78: Stock Market Turnover (SAR bn) 1, Source: Tadawul, SAMA December 217, 87.4 Jan-4 Nov-4 Sep- Jul-6 May-7 Mar-8 Jan-9 Nov-9 Sep-1 Jul-11 May-12 Mar-13 Jan-14 Oct-14 Aug-1 Jun-16 Apr-17 Figure 79: Domestic Shares held by Domestic Investment Funds (SAR bn) Q Q Q1 2 Q1 21 Q1 22 Q1 23 Q1 24 Q1 2 Q1 26 Q1 27 Q1 28 Q1 29 Q1 21 Q1 211 Q1 212 Q1 213 Q1 214 Q1 21 Q1 216 Q1 217 Figure 8: Share Ownership Status 1% 8% 6% 4% 2% % Jul-21 Sep-21 Nov-21 Jan-216 Mar-216 May- Jul-216 Sep-216 Nov-216 Jan-217 Mar-217 May- Jul-217 Sep-217 Individuals Institutions Govt. Related Entities GCC Investors Foreign Investors Nov-217 Figure 81: Total Assets of Investment funds (SAR bn) SAUDI ARABIA 218 OUTLOOK January 218 P a g e 39

40 Annexure 1: Chart Pack IV. Corporate earnings Figure 82: TASI Revenue and YoY growth (Quarterly) Figure 83: TASI Revenue and YoY growth (Annual) Q3 217, % (1) (2) Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 21 Q3 21 Q1 216 Q3 216 Q (1) Rev (SAR bn)- LHS Rev (%yoy) - RHS Rev (SAR bn)- LHS Rev (%yoy) - RHS Source: Reuters Eikon Source: Reuters Eikon Figure 84: TASI EBITDA and YoY growth (Quarterly) Figure 8: TASI EBITDA and YoY growth (Annual) Q (2) (4) (1) Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 21 Q3 21 Q1 216 Q3 216 Q (2) EBITDA (SAR bn) - LHS EBITDA (%yoy) - RHS EBITDA (SAR bn) - LHS EBITDA (%yoy) - RHS Source: Reuters Eikon Source: Reuters Eikon Figure 86: TASI PAT and YoY growth (Quarterly) Q () (1) (1) (2) Figure 87: TASI PAT and YoY growth (Annual) (1) (2) Profit (SAR Bn) -LHS Profit (% yoy) - RHS Profit (SAR Bn) -LHS Profit (% yoy) - RHS Source: Reuters Eikon Source: Reuters Eikon Figure 88: TASI EBITDA and PAT margin (%) - Quarterly Figure 89: TASI EBITDA and PAT margin (%) - Annual Q3 217, Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 Q1 21 Q3 21 Q1 216 Q3 216 Q1 217 Q EBITDA margin Net profit margin EBITDA margin (%) PAT margin (%) SAUDI ARABIA 218 OUTLOOK January 218 P a g e 4

41 Annexure 1: Chart Pack V. Tadawul Sector Earnings Performance Earnings (SAR mn) Market Cap (SAR mn) Q3 217 Q3 216 Q2 217 % YoY % QoQ Materials 7,43 8,72.4 7,98.4 6, Banks 8,26 11, , , Telecommunication Services 17,744 2,39. 1, , Real Estate 18, Utilities 89,143,3.6 4, , Food, Beverage & Tobacco 87,31 1, , Insurance 41, Diversified Financials 36, Energy 31, Health Care 28, Retailing 26, Transportation 13, Consumer Services 13, Capital Goods 9, Commercial Services 7, Food & Staples Retailing 7, Media, Pharmaceuticals 3, Consumer Durables & Apparel 3, Total 1,76,477 32,878 27,687 2, Source: Reuters Eikon, Bloomberg, MCap and results as of January 21, 217 SAUDI ARABIA 218 OUTLOOK January 218 P a g e 41

42 Annexure 1: Chart Pack H. Annexure 2: Saudi Arabia Key Statistics SAUDI ARABIA 218 OUTLOOK January 218 P a g e 42