Table 1 Key macro indicators. Source: SAMA, * Provisional

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1 Saudi Arabian economy Research Department ARC Research Team Tel , Saudi Arabian Economy The Kingdom maintained oil output at an elevated level (~10.3mbpd in April 2016), in-line with its focus on market share. However, oil prices rose in April due to falling US crude output and production disruptions in a few regions. Saudi nonoil PMI fell m-o-m in April to 54.2, but is still robust, indicating continued expansion in the non-oil economy. Inflation in the Kingdom remained at ~4.3% y- o-y in March, primarily due to the hike in energy and utility prices, coming into effect from the start of the year. Saudi inter-bank lending rates surged to above 2%, the highest level since With deposits starting to decline, the banking sector is likely to feel the squeeze (partly offset by relaxed cap on loan-to-deposit ratio to 90% from 85% in February by SAMA). Non-oil exports dropped at a fast pace in January Non-oil imports also fell in January, albeit at a slower pace compared to December. The recently released Saudi Vision 2030 document comprised proposals which aim to transform the economy away from dependence on oil, by targeting higher private sector involvement, creating additional revenue streams for the government and more efficient utilization of Kingdom s resources. A cabinet reshuffle was also done to support the reforms. Further details of reforms are to be shared in the National Transformation Plan (NTP), which is likely to be announced next month. On the equity front, the benchmark index TASI logged a monthly gain of 9.4% in April, tracking better than expected Q1 results, rise in crude prices and optimism in the market on reforms. Foreign Reserve Assets: Foreign reserve assets declined for the 14 th consecutive month in March 2016, falling to the lowest level since April The decline in reserves could be attributed to the measures taken by the Kingdom to cover its budget deficit due to lower oil revenue. In order to finance the deficit, the Saudi government is likely to raise US$10 billion from global banks. Key indicators: Saudi Arabia s crude oil production edged up 0.2% on a yearly basis in April 2016 to reach around 10.3mbpd. Brent crude oil prices advanced 16.2% m-o-m to reach US$ 47.37/barrel at the end of April Money supply (M3) edged down 0.4% y-o-y in March 2016, while inflation was up by 4.3% y-o-y in the same month. Point of sale transactions (POS) grew 2.0% y-o-y, whereas ATM cash withdrawals fell by 3.0% y-o-y in March Crude price outlook: The US Energy Information Administration (EIA), in its April 2016 report, estimated Brent crude oil prices to average around US$35/barrel in 2016 and US$41/barrel in Table 1 Key macro indicators Variable Mar-16 Feb Inflation Rate (2007=100) 4.3% 4.2% 2.2% 2.7% Average Oil Price (Arab Light) (US$/Barrel) Money Supply (M3) -0.4% -0.9% 2.6% 11.9% Total Banking Sector Claims Interbank Interest Rate (3 Month) (BP) Repo Rate (BP) Reverse Repo Rate (BP) Source: SAMA, * Provisional Q4 2015* Q3 2015* 2015* 2014* GDP Rate at Constant Prices (2010=100) 3.64% 3.61% 3.4% 3.6% Current Account to GDP Ratio (current prices) -14.7% -6.7% -8.2% 9.8% Total Imports (fob) to GDP Ratio (current prices) 23.8% 23.9% 23.7% 21.0% Non-oil Exports to GDP Ratio (current prices) 7.6% 7.9% 7.6% 7.7% Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer. 1

2 Crude oil production edged up 0.2% y-o-y in April 2016 to reach 10.3mbpd Crude oil dynamics Saudi Arabian crude oil production stood at 10.3mbpd in April 2016, indicating a 0.2% y-o-y rise. On a sequential basis, crude oil production advanced 0.8% m-o-m (versus a drop of 0.1% in March). Crude oil prices climbed 16.2% m-o-m in April 2016, versus a rise of 7.8% in the previous month. The rise in oil prices was supported by a continuous drop in US crude output, along with a weak US dollar. Oil prices were also boosted by the production disruption in Kuwait (worker strike), Nigeria, and Venezuela. The fall in US oil rig count also supported the jump in oil prices. Meanwhile, Arab light climbed 23.5% m-o-m in April Figure 1 Saudi crude oil production trend Figure 2 Crude oil prices trend mbpd % 8.0% 6.0% 4.0% 2.0% -2.0% -4.0% -6.0% Source: Bloomberg, Al Rajhi Capital Saudi Crude oil production growth Source: Bloomberg, Al Rajhi Capital Brent WTI Arab Light Saudi Interbank Offered Rates Saudi interbank offered rate recorded its highest level in seven years The three-month Saudi Interbank Offered Rate rose by ~22bps to 2.03% in April 2016, recording its highest peak since January 2009 owing to low oil prices and increasing government borrowings, leading to a tight liquidity scenario in the Kingdom. The Saudi interbank offered rate has witnessed a jump of 46bps in 2016, the highest increase since Non-oil foreign trade The Kingdom s non-oil exports and nonoil imports in January fell by 22.2% and 6.7%, respectively. As per the latest foreign trade data released by the General Authority for Statistics, Saudi Arabia s non-oil exports plummeted by 22.2% y-o-y in January, as compared to annual declines of 3.4% and 12.5% in December and November, respectively. Non-oil exports were mainly backed by the fall in exports of chemical products (-40.4% y-o-y), which constituted 24.4% of total exports, together with an 11.1% fall in plastic & rubbers, which accounted for 33.1% of total exports. Moreover, non-oil imports declined by 6.7% y-o-y in January, versus an 8.8% y-o-y decline in December. The non-oil imports were pulled down by ordinary metals (-30.3% y-o-y) and machinery & electrical (-12.2% y-o-y), which together contributed 35.2% of total non-oil imports. Meanwhile, the UAE maintained its position as the topmost non-oil export destination (14.5% of total exports), while the USA continued to be on the forefront of non-oil imports destination, constituting 14.5% of total imports followed closely by China at 14.3% of total imports. Disclosures Please refer to the important disclosures at the back of this report. 2

3 Table 2 Non-Oil Exports Commodities (SAR mn) Nov-15 Dec-15 Jan-16 % y-o-y % m-o-m Plastics & Rubbers 4,613 4,505 4, % -8.1% Chemical Products 4,425 4,880 3, % -37.3% Ordinary Metals 1,222 1,211 1, % -2.2% Transport Equipments 1,436 1,987 1, % -32.7% Others 3,336 3,275 2, % -14.4% Total 15,032 15,858 12, % -21.0% Figure 3 Components of non-oil exports Figure 4 Export Destinations 22.4% 13.0% 33.1% 14.5% 10.7% 9.5% 63.9% 5.2% 24.4% Plastics & Rubbers Chemical Products Ordinary Metals Transport Equipments Others China UAE Singapore India Others Table 3 Non-Oil Imports Commodities (SAR mn) Nov-15 Dec-15 Jan-16 % y-o-y % m-o-m Machinery & Electricals 13,112 12,806 12, % Transport Equipments 10,018 12,330 9, % -26.5% Ordinary Metals 4,123 3,940 4, % 6.9% Chemical Products 4,401 4,344 4, % 3.8% Others 15,556 17,705 17, % 0.4% Total 47,210 51,125 48, % -5.4% Disclosures Please refer to the important disclosures at the back of this report. 3

4 Figure 7 Components of non-oil imports Figure 8 Source countries 14.3% 26.5% 36.7% 14.5% 58.2% 9.3% 8.7% 18.7% 6.0% 7.0% Machinery & Electricals Transport Equipments Ordinary Metals Chemical Products Others China USA Germany Japan Others Figure 9 Non-oil export trend (y-o-y) Figure 10 Non-oil import trend (y-o-y) Non-oil Export Non-oil Import The pace of decline in money supply (M3) was eased in March 2016 Monetary and credit indicators Money supply Broader money supply (M3) fell for the second straight month by 0.4% y-o-y in March 2016 to reach SAR1,778bn, albeit at a slower pace as compared to 0.9% y-o-y fall in the last month. The annual decline in money supply (M3) eased in March as the fall in demand deposits was partially offset by an increase in time and savings deposits. However, on a monthly basis, M3 rose 1.5% in March 2016, as compared to the previous month s fall of 0.7%. Disclosures Please refer to the important disclosures at the back of this report. 4

5 Figure 11 Money supply growth (y-o-y) 25.0% Figure 12 Deposits break-up 1, % 5.0% -5.0% 1, M1 M2 M3 Time and Saving Deposits Demand Deposits Increase in deposit growth on a sequential basis led to lower loan-todeposit ratio Credit and deposit growth Total credit growth continued to be healthy at y-o-y in March 2016 (versus y-o-y in February 2016). Deposits declined by 0.6% y-o-y in March 2016, versus a drop of 1.0% last month. The growth in deposit rate (+1.6% m-o-m in March versus - 0.6% m-o-m in February) was largely due to the increase in deposits from the private and government sectors. The increase in deposits led to a fall in the loans-to-deposit ratio for the first time in five months to 87.5% in March 2016 as compared to 88.1% in the previous month. Figure 13 Credit and deposit growth Figure 14 Loans to deposits 18.0% 16.0% 14.0% 12.0% 8.0% 6.0% 4.0% 2.0% -2.0% 90% 88% 86% 84% 82% 80% 78% 76% 74% Deposits Credit Loans to Deposit ratio Foreign reserve assets continued to decline in March although at a slower pace as compared to the previous month Foreign reserve assets Foreign reserve assets declined for the 14th month in a row. Assets declined ~15.9% y- o-y and stood at SAR2,202bn (~US$587bn) at the end of March 2016, since the government continued to utilize foreign reserves to cover its budget deficit. The foreign reserves declined 0.9% (m-o-m) in March, versus a fall of 1.6% (m-o-m) in February. Meanwhile, foreign deposits abroad inched down 0.1% m-o-m, versus a fall of 2.4% in February, while investment in foreign securities dipped 1.4% m-o-m, as compared to a decline of 0.7% m-o-m in February. Disclosures Please refer to the important disclosures at the back of this report. 5

6 Figure 15 Foreign reserves 3,000 2,500 2,000 1,500 1, % 5.0% -5.0% % -2 Figure 16 Major components of foreign assets 2,500 2,000 1,500 1, Foreign Reserves Assets Foreign Currency & Deposits Abroad Investment in Foreign Assets Inflation edged up to 4.3% y-o-y in March 2016, primarily on the back of rise in prices of utilities and furnishings & household Inflation dynamics Inflation in Saudi Arabia edged up to 4.3% y-o-y in March, as compared to 4.2% in February. The rise in general cost of living index was mainly led by a jump in costs of furnishings & household, which rose 2.8% y-o-y, as compared to 1.5% in the previous month, followed by housing, water, electricity & gas segment, which increased 8.5% y- o-y. Annual inflation in the transport segment eased down slightly to 12.4%, versus 12.7%, in the previous month, while food & beverages prices also rose at a slower annual pace of 0.6%, as compared to 1.3% in the past month. On a monthly basis, the overall inflation increased 0.2% in March, up from -0.1% in February. Figure 17 Inflation trend (y-o-y) Figure 18 Inflation drivers (y-o-y) 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 14.0% 12.0% 8.0% 6.0% 4.0% 2.0% -2.0% -4.0% General Index Food And Beverages Transport Furnishings, Household Housing, Water, Electricity, Gas Source: GAS, Al Rajhi Capital Source: GAS, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 6

7 Benchmark Index TASI advanced 9.4% (m-o-m) in April Figure 19 Tadawul index performance Stock market indicators The benchmark index (TASI) surged 9.4% m-o-m in April 2016, versus a monthly gain of 2.1% in March. The overall index was supported by sectors such as Industrial Investments, Hotel & Tourism, Petrochemical, Transport and Building & Construction, which rose 19.9%, 18.9%, 14.2%, 13.1%, and 12.9%, respectively. Saudi Kayan Petrochemical Co. was the top performer on the index, delivering a return of 39.3% in April Figure 20 TASI one year historic 12-month forward P/E chart Index Million x 17.0x 16.0x 15.0x 14.0x 13.0x 12.0x 11.0x 10.0x 9.0x 8.0x Volume RHS TASI Source: Bloomberg, Al Rajhi Capital, Data from 31 st March 2016 to 29 th April 2016 Source: Bloomberg, Al Rajhi Capital Figure 11 Top 5 Sectors MoM Figure 22 Bottom 5 sectors MoM 25.0% 2 8.0% 15.0% 5.0% 6.0% 4.0% 2.0% -2.0% -4.0% -6.0% Source: Tadawul, Al Rajhi Capital, MoM returns for April Source: Tadawul, Al Rajhi Capital, MoM returns for April Figure 4 Top 5 Gainers for the month of April Name Monthly Return Market cap () Avg volume (mn) Sectors Saudi Kayan Petrochemical Co 39.3% Petrochemical Industries United Wire Factories Co 37.2% Building & Construction Bawan Co 32.8% Building & Construction National Industrialization Co 31.4% Petrochemical Industries Saudi Arabian Mining Co 28.7% Industral Investment Source: Bloomberg, Al Rajhi Capital, Companies with market cap more than SAR 1bn Disclosures Please refer to the important disclosures at the back of this report. 7

8 Figure 5 Top 5 Losers for the month of April Name Monthly Return Market cap () Avg volume (mn) Sectors Fawaz Abdulaziz Al Hokair & Co -7.0% Retail Saudi Investment Bank/The -6.3% Banking & Financial Services Al Khaleej Training and Education Co -4.4% Retail Savola Group/The -2.4% Agriculture & Food Industries Aldrees Petroleum and Transport Services -1.7% Retail Source: Bloomberg, Al Rajhi Capital, Companies with market cap more than SAR 1bn PMI edged down in April, while POS witnessed improvement in March Figure 23 Point-of-sale transactions (POS) trend Consumer spending indicators The Emirates NBD PMI reading edged down to 54.2 in April 2016 (54.5 in the previous month), mainly due to slow growth in business activity. According to an Emirates NBD PMI report, the non-oil private sector slowed as decline in exports for the first time since 2009 negatively impacted the total new work. Point-of-sale (POS) transactions were up 2.0% y-o-y in March as compared to a fall of 9.0% y-o-y in February. On the other hand, ATM cash withdrawals were down 3.0% y-o-y in March, versus a fall of 16.6% y-o-y in February. Figure 24 ATM cash withdrawals trend % % % 30% 20% 10% 0% -10% % 30% 20% 10% 0% -10% - -20% - -20% POS ATM Cash withdrawals Figure 25 Emirates NBD Saudi PMI Index Figure 26 Consumer spending trend (POS and ATM cash Withdrawals) POS ATM Cash withdrawals Source: Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 8

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