Saudi Arabian economy Moderation in 2013 and rebound in 2014

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1 Research Department Md. Rahmatullah Khan, Economic analyst Tel: , khanmr@alrajhi-capital.com Saudi Arabian economy Saudi Arabian economy Moderation in 2013 and rebound in 2014 Saudi Arabian economy remains on strong footing as we upgrade our growth forecast for the current year due to higher crude production than earlier expected. The growth is expected to slow down next year primarily because of expected decline in oil production. However, we expect it to rebound in Non-oil sector is expected to remain on solid growth path in the next two years. Fiscal and external surpluses are expected to reach record levels in 2012 after wards we expect them to moderate in the next two years. Inflationary situation is expected to be stable with downward bias during our forecast horizon. Economic growth: In the wake of higher than expected oil production, we have revised up our growth forecast for the year 2012 while we expect slow down next year. Crude production has averaged around 9.8 mbpd in the first ten months of 2012 which is higher than our earlier expectation of 9.45 mbpd. We expect the production to decline to 9.3 mbpd in 2013 and recover to 9.4 mbpd in We expect nominal GDP to reach SAR2354bn in 2012, an 8.8% growth from the last year. However, nominal GDP is expected to be flat next year which will rebound to SAR2530bn in For real GDP, we expect growth to be 4.9% this year and a slow down to 3.3% in However, the growth is expected to rebound to 4.5% in Fiscal and external balance: Government budget surplus and external surplus are expected to reach a new record level in 2012 due to record high level of average daily production in three decades and a record level of average crude prices for the year. Budget surplus is expected to reach SAR493bn in 2012 with total revenue of SAR1239bn and spending of SAR746bn. We expect the surplus to shrink to SAR220bn in 2013 as revenue comes down. However, surplus is expected to rise slightly to SAR232bn in Trade balance is expected to reach SAR944bn (40% of GDP) in 2012 which will decline to SAR669bn (28% of GDP) in However, it is expected to remain flat in 2014 at SAR678bn (27% of GDP). Similar trend is expected in current account balance as it will peak in 2012 at SAR609bn (26% of GDP) to decline to SAR329bn (14% of GDP) in 2013 and SAR328bn (13% of GDP) in Table 1. Macroeconomic Indicators for Saudi Arabia Real GDP ( growth) 0.1% 4.6% 7.1% 4.9% 3.3% 4.5% Nominal GDP (SAR billion) Inflation (monthly average) 5.1% 5.3% 5% 4.7% 4.2% 4% Revenue (SAR billion) Expenditure (SAR billion) Fiscal Balance (SAR billion) Trade balance (SAR billion) Current account (SAR billion) Current account (% of GDP) 6% 15% 27% 26% 14% 13% 1

2 Real economic indicators Figure 1 Moderation in crude production since July in Saudi Arabia USD per barrel WTI Brent Source: OPEC, Al Rajhi Capital million barrel per day 10.5 Arab Lights KSA production-rhs Crude production and price movement and expectation The crude production has been rising in Saudi Arabia since global recovery started in the middle of The average daily production was 8.3 mbpd in 2010 which jumped up to 9.3 mbpd in 2011 due to supply disruptions in Libya and other smaller oil producing countries. Even though large portion of supply in Libya has been restored this year, Saudi crude production remains elevated. Average daily crude production in Saudi Arabia in the first ten months of 2012 has been 9.8 million barrel per day as reported by Organization of Petroleum Exporting Countries (OPEC). The average production in Jan-Oct period is 6% higher compared to the daily average production in However, the production has been easing after peaking in June when it crossed 10 mbpd. The latest data available from OPEC shows that the average daily production was 9.7 million barrel in October. We expect the average daily production to be around 9.7 million barrel in higher than our forecast in April which was 9.45 mbpd. The average crude prices in 2012 have been flat compared to average price in Average Brent price this year has been USD112.1 per barrel compared to USD111.3 per barrel last year. Average WTI Nymex crude price has been similar at around USD95 per barrel in The average Arab Light prices have been USD110.5 per barrel in close to our forecast of USD112 per barrel in April this year. Years ahead Global demand and supply dynamics of crude oil market are undergoing a change currently as global growth getting uneven and production in North America is expected to rise in coming years. Growth prospects in the US have improved recently and Chinese economy seems to be turning around for better. However, Europe remains stuck in recession and Japanese outlook has worsened in recent months. The global growth is expected to be 3.3% in 2012 which is expected to improve only slightly to 3.6% next year (IMF forecast). However, it is expected to pick up in 2014 to reach 4.1%. Under such sluggish growth environment this year and the next, demand growth for crude is also expected to be moderate. OPEC expects crude demand to rise by 0.77 mbpd in 2013 to reach 89.6 mbpd. However, with pick up in global growth in 2014, demand growth for crude is also likely to be higher than 0.77 mbpd. On the other side, supply is expected to grow faster as OPEC forecasts non-opec supply to increase by 0.9 mbpd in Half of this expected increase in the crude production will come from North America. This means that the OPEC will need to produce less in 2013 compared to what it has been producing in In fact the slight decrease has been noticed in OPEC production in recent months. Total OPEC production was mbpd in August which eased to mbpd in September and to mbpd in October. Table 2 Crude production and price forecast Crude production in KSA (in thousand barrel per day) Arab Lights crude price (USD per barrel) Source: OPEC, Al Rajhi Capital Given demand and supply dynamics in the global crude market, we expect that crude production in Saudi Arabia will continue to ease through We expect crude production to average around 9.3 million barrel per day next year compared to an estimated 9.7 mbpd production in However, as global growth picks up further in 2014, we expect crude production in the country to turn around. Crude production is likely to be slightly higher at 9.4 mbpd in On the price front, we expect slight moderation in crude prices in 2013 compared to 2012 but expect to pick up in Based on fundamentals, we expect Arab Lights crude price to average USD102 per barrel in 2013 and USD105 per barrel in Nominal GDP growth The nominal GDP growth in the first two quarters of the current year was robust though it showed moderating trend as expected due to flattening trend in crude production and prices. The nominal GDP grew by 16.9% y-o-y and 6.8% y-o-y in Q1 and Q2 of 2012 respectively. The moderation was witnessed primarily due to sharp deceleration in oil sector which grew by 25.3% y-o-y in Q1 but only 7.3% y-o-y in Q2. However, it is worth reiterating that the moderation was mainly due to very high base in Disclosures Please refer to the important disclosures at the back of this report. 2

3 Table 3 Nominal GDP growth forecast Oil Sector -38.8% 31.7% 41.0% 9.0% -6.8% 5.0% Non-oil private sector 3.1% 8.6% 14.0% 11.6% 9.0% 11.0% Non-oil government sector 7.5% 15.8% 14.0% 4.0% 10.0% 12.0% Nominal GDP -21.8% 21.0% 28.0% 8.8% 0.2% 8.0% Non-oil sector remain resilient as growth in the sector was 6.7% y-o-y in Q1 and 5.9% y-o-y in Q2 of 2012 due to robust growth in the non-oil private sector. Non-oil private sector grew 10.6% y-o-y and 11.1% y-o-y in Q1 and Q2 respectively as against non-oil government sector growth of 0.2% y-o-y and -1.8% y-o-y during these two quarters. We expect nominal GDP to grow around 8.8% in 2012 as we forecasted in April. However, we have revised up growth in the oil sector due to higher average production than our expectation. At the same time, we have revised down growth expectation in non-oil government sector whereas keeping growth expectation in non-oil private sector unchanged. Now we expect oil sector to grow by 9% and non-oil government sector to grow by 4% whereas non-oil private sector to grow at 11% as expected earlier. Looking ahead, we expect nominal GDP to be flat (0.2%) in 2013 as we expect crude production to decline and crude price to moderate slightly next year. Oil sector is expected to decline by 6.8% whereas growth in non-oil government sector is expected to rebound to 10%. Growth in the non-oil private sector is expected to remain robust though slightly lower at 9%. We expect nominal GDP growth to rebound to 8% in 2014 as oil sector growth comes back. Oil sector growth is expected to be 5% as crude production is expected to be higher along with slight appreciation in crude prices. Growth in non-oil private sector and government sector are expected to be 11% and 12% respectively. Figure 2 Quarterly data points moderation in real GDP growth 20% 15% 10% 5% 0% -5% Annual growth rate Q Q Q Q Q Q Oil sector Non-oil govt sector Non-oil pvt sector Real GDP growth Table 4 Real GDP growth forecast Oil Sector -7.6% 2.1% 4.3% 3.6% -3.0% 1.6% Non-oil private sector 2.7% 5.3% 8.3% 6.1% 5.8% 5.6% Non-oil government sector 5.2% 5.9% 6.7% 4.0% 5.0% 5.2% Real GDP 0.1% 4.6% 7.1% 4.9% 3.3% 4.5% Real GDP growth Economic growth in the first half of the current year was robust as real GDP grew by 5.9% y-o-y in Q1 and 5.5% y-o-y in Q2 of Oil sector grew by 7.2% and 5.8% respectively in the first two quarters whereas non-oil private sector growth was 5.7% and 5.5% respectively. As crude production has flattened in the second half of the current year, growth in the oil sector is expected to moderate sharply in the second half. However, we expect non-oil sector to continue its strong performance. Among non-oil sectors, manufacturing remains on strong growth even though it moderated slightly in Q2. The growth in the sector was 8.4% y-o-y in Q1 and 6.9% y-o-y in Q2. Growth in construction sector also remained robust as the sector grew 9.1% y-o-y in Q1 and 9.3% y-o-y in Q2. Wholesale and retail trade grew 6.6% y-o-y and 7.8% y-o-y in the first two quarters of However, financial services, insurance and business services was laggard as the sector grew by only 1.8% y-o-y and 2% y-o-y in Q1 and Q2 respectively. Having said that, due to stronger than expected growth in the first half especially in the oil sector, we have revised up our forecast for real GDP growth for the entire year of 2012 from 4.4% to 4.9%. Looking ahead, we see moderation in economic growth in 2013 due to decline in oil production. However, growth is expected to rebound in 2014 as global growth picks up and consequently crude production in the country inches up. We expect real GDP growth to moderate to 3.3% in 2013 from our forecast of 4.9% for 2012 due to decline in crude production. Oil sector is expected to contract by 3% whereas non-oil sector is expected to remain on strong growth trajectory. Non-oil private sector is likely to grow at 5.8% whereas non-oil government sector is expected to grow at 5%. As we expect oil production to rise in 2014, oil sector growth is expected to turn around into positive territory. The sector is expected to grow by 1.6% during the year. Growth in non-oil sector is expected to continue to be robust. We expect non-oil private sector to grow at 5.6% and non-oil government sector to grow at 5.2%. Our expectation for overall real GDP growth in 2014 is 4.5%. Fiscal balance Fiscal balance of the government remains in strong position as revenue has been higher than expenditure since 2003 except However, government fiscal balance remains overwhelmingly dependent on oil revenue as it constitutes almost 90% of the total revenue. The average share of oil revenue in total revenue is 87% every year since Therefore, rising crude production and prices have positive effect on fiscal condition of the government. Our expectation of average 9.7 mbpd in 2012 is the highest level of average daily production in the country since The high level of production is coupled with a record average price for a year which is expected to be around USD112 per barrel in The combination of record level of production in three decades and all time record high average prices for a year is likely to result into a record level of government revenue. In the wake of higher than expected crude Disclosures Please refer to the important disclosures at the back of this report. 3

4 Table 5 Government revenue and expenditure forecast Total Revenue Oil Non-oil Total Expenditure Current Capital Fiscal Balance Fiscal Balance(% of GDP) -6.1% 5.2% 14.1% 20.7% 9.3% 9.1% Table 6 External sector forecast Export ,487 1,250 1,317 Import Trade balance Trade balance (% GDP) 26% 33% 40% 40% 28% 27% Current account Current account (% GDP) 6% 15% 28% 26% 14% 13% production in H1 we revise up our forecast for government revenue from SAR1137bn to SAR1239bn for the year 2012, an all time high. Note that the government revenue was SAR1100bn in We keep our government spending expectation for the current year unchanged. Higher revenue than expected earlier with no change in spending will result into higher budget surplus than expected earlier. Therefore, we expect budget surplus to be SAR493bn compared to our earlier forecast of SAR391bn. As we expect oil production to be lower next year with slightly lower oil prices, government revenue is expected to peak in This means that government revenue is expected to be lower next year compared to this year. We expect government revenue to be SAR1030bn in 2013 which is lower than our expectation for However, government spending is expected to come back on rising trend in 2013 after a drop this year. The government spending is expected to be SAR810bn compared to an expected spending of SAR746bn in This will reduce the budget surplus next year to SAR220bn. Moreover, government is expected to have higher revenue and spending in 2014 compared to Total revenue is expected to be SAR1122bn whereas spending is likely to be SAR890bn in This will result into budget surplus of SAR232bn that year. Trade and current account Average daily crude production ( average 9.7 mbpd) at record level in three decades coupled with all time high average prices (USD112 per barrel) for a year are expected to result into a record level of export revenue for Saudi Arabia in We expect export revenue to be SAR1487bn in 2012 compared to SAR1376.6bn in However, as we see lower crude production and prices next year, export is also expected to be lower at SAR1249bn in However, it is expected to rebound to SAR1317bn in On the other side, import is expected to be SAR543bn in 2012 which is forecasted to grow to SAR581bn in 2013 and SAR639bn in Therefore, trade balance is expected to peak in 2012 at SAR944bn after which it is expected to be SAR669bn in 2013 and SAR678bn in Thus, trade balance as percent of GDP is expected to be 40% in 2012, 28% in 2013 and 27% in With strong trade balance, current account balance is also expected to be robust. As stated above, trade account surplus is expected to be SAR944bn in 2012 whereas we expect service account deficit to be in tune of SAR255bn. Combining expected foreign income at SAR35bn and outflow of remittances at SAR115bn with goods and services account provides us an expected SAR609bn surplus in current account this year. However, this surplus is expected to shrink to SAR329bn in 2013 and SAR328bn in As percent of GDP the current account surplus is forecasted at 26% for 2012, 14% for 2013 and 13% for Figure 3 Inflation on the path of moderation 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Inflation Inflation Inflation has evolved over the current year as per our expectation. It has been declining from 5.4% in February this year and bottomed at 3.6% in September. It turned around in October to 3.8%. The average monthly inflation for the first ten months of 2012 is 4.7%, exactly similar to our forecast for the entire year made in April. Therefore, we retain our inflation forecast averaging 4.7% for The easing in inflation index has been broad based as most components of the index have moderated over the year. Most notable decline happened in other expenses and services which was rising close to double digit in early months of the current year. The component index actually declined in September (-0.4% y-o-y). Other large component rent, renovation, fuel and water also eased from above 9% to around 7% during the course of the current year. We expect inflation to moderate further to around 4.2% in 2013 mainly on account of moderating rent inflation and modest food inflation. International Monetary Fund expects that commodity price index which includes both fuel and non-fuel will decline by 2% whereas commodity price index which includes food and beverages will decline by 2.2% next year. This will cap the upside move in domestic food prices. The succeeding year, inflation is expected to be around 4%. Disclosures Please refer to the important disclosures at the back of this report. 4

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