Saudi Arabia Chart Book

Transcription

1 This and othercations can be Downloaded from Saudi Arabia Chart Book Executive Summary Office of the Chief Economist Economics Department Samba Financial Group P.O. Box 833, Riyadh Saudi Arabia ; Ext (Riyadh) (London) Global economic activity has continued to gather pace. The upturn has been led by advanced economies, with the US and Japan reporting steady growth, the UK accelerating rapidly, and the euro-zone finally coming out of recession. The US dollar trade-weighted index has edged up, reflecting some capital flight away from EMs (see below). But with the Fed still pumping out liquidity and the European banks paying back long term debt to the ECB, further upward movement against the euro is likely to be limited. Emerging Markets have come under renewed pressure as the withdrawal of QE continues to expose those EMs where reform has lagged. Most of the focus remains on the Fragile Five (Brazil, India, Indonesia, South Africa and Turkey) given their large current-account deficits and intractable political issues. All five should retain market access, but at higher prices, particularly as the withdrawal of QE gathers momentum and market interest rates rise. In our view Turkey remains the most vulnerable given its sizeable debt burden and high inflation, combined with a toxic political atmosphere that is likely to stymie reform efforts. Oil prices have been essentially range-bound with traders weighing strong supply growth from North America against a marginally improving demand picture. Nevertheless, prices would be lower were it not for outages in a number of countries, most notably Libya. Saudi Arabia s output has eased a bit in recent months and it will need to take a more active approach to keep the market in balance, especially if Iranian production comes back on line in 2015, as seems likely. Industrial metals prices slipped again in January and the outlook remains soft given a weaker Chinese growth story, the withdrawal of US quantitative easing, and strong supply additions scheduled for this year. Official data show that Saudi GDP grew by 3.8 percent in 2018, down from 5.8 percent in The slowdown mainly reflected a negative contribution from the oil sector, but a weaker pace of government consumption was also at play. The data were compiled before the end of the year and could well be revised. Despite last year s weakness, 2014 has started brightly with the January nonoil PMI expanding at the fastest rate since October The spurt in new orders might reflect the breaking of a logjam following last year s crackdown on illegal labour, which put a good deal of project spending on hold. 1

2 February 2014 The Global Economic Backdrop The pickup in advanced economies in the second half of last year is evident from PMI readings. The US January PMI lurched downwards, but this was mainly a reflection of the freezing weather. Following a decent third quarter, China s manufacturing performance has fallen back again. This may reflect dislocations in the financial sector as the central bank seeks to deflate a credit bubble. The US Fed has begun withdrawing monetary stimulus at a rate of $10bn a month. Having had ample time to prepare, developed markets have taken this largely in their stride and the yield on the benchmark 10 year Treasury remains comfortably below 3 percent. Nevertheless, most expect the ten year to end 2014 well above 3 percent as the process of interest rate normalization gradually gathers pace. 2

3 February 2014 For the moment, US interest rates are in comfortable territory. The key 30 year fixed mortgage rate has even fallen back following the tapering announcement. House prices have continued to move higher, though there has been some easing in housing starts and mortgage demand has also fallen. The US dollar has yet to gain sustained strength from tapering. It may take some time to do so since additional dollars will continue to be pumped out until tapering is complete; by contrast the stock of euros is contracting as European banks repay loans to the ECB. However, it s been a different story for Emerging Markets. The advent of tapering, combined with slowing output growth in China and political rancour in countries such as Turkey, Ukraine and South Africa, have seen average EM yields spike. 3

4 February 2014 Market pressure has been most evident in Brazil, India, Indonesia, South Africa and Turkey. The so-called Fragile Five all have large currentaccount deficits and most have intractable political problems. Of the five, Turkey is seen by many as the most vulnerable given increasingly toxic political battles, a large foreign debt position and the questionable credibility of the central bank s stance. Like Turkey s, South Africa s central bank has also been slow to raise rates. The country s structural economic problems are deep rooted. The same might be said of India, but here at least the new central bank governor has been the most proactive, hiking rates early and aggressively to ensure that inflation targets are met, even at the cost of lower growth. As tapering gathers pace so investor discrimination is likely to become more evident. Thus, countries where reforms have stalled or where credit growth is rising too fast are likely to come under pressure again. 4

5 February 2014 Commodities Oil prices have been generally range bound, with markets weighing supply outages against a weak demand picture. That said, there has been some recent uptick in prices following the IEA s decision to increase its global demand forecast based on firmer activity in the developed economies. This has helped to offset other data showing weaker Chinese oil demand growth last year. In the US, the notion that oil demand might have reached some sort of structural peak is having to be revised. The abundance of cheap shale oil, along with decent population growth, has revived oil demand. Mixed signals on the demand side are matched by a confused supply picture. Libya s output remains depressed amid a chaotic political scene, though there are reports that recent tanker loadings have picked up markedly. Iraq s output remains volatile dogged as it is by security and technical issues but has not been able to recapture the highs registered in mid Sudan s production has collapsed again following the outbreak of civil war in the south. 5

6 February There is no doubt about the trajectory of US oil production, which is pushing 8 million b/d. This means that US output has grown 2.5 million b/d in just three years. The prospect of Iran s return to the market is also weighing on sentiment. Sanctions on some nonoil trade have already been temporarily lifted. If Iran complies with the West s demands on its nuclear activities over the next six months, then the end of the oil embargo is much more likely. This prospect will be hovering in the background of Saudi policymakers minds. For the moment, Saudi crude production is relatively high, mainly reflecting the ongoing outages in Libya and elsewhere. The futures market still points to a gradual downward drift in prices based on the fundamentals of strong gains in North American output, and the prospect of increased Libyan, Iraqi and Iranian output. 6

7 February 2014 US natural gas prices spiked in December thanks to the extreme cold in large parts of the country. US gas prices are quite strongly correlated with US temperatures. During 2013 the price of US natural gas rose by around a third and has doubled since its low point of around $2/mmbtu in early This is in contrast to the price of gas in the UK and Japan, where prices barely moved over the year and remain much higher than US equivalents. The prices of most key industrial metals slipped again in January reflecting concerns about the risk of a slowdown in Chinese demand after a disappointing PMI reading. Shanghai steel prices have fallen owing to oversupply. The January fall in iron ore prices is likely to lead to further downward pressure on steel prices globally in the next few months. 7

8 The end of the year was relatively quiet for most agricultural commodities. The price of US wheat and soybeans eased in December thanks to better than expected supply data. Over the past year as a whole, the price of US soybeans and grains, particularly corn, have plummeted as record harvests in the US and elsewhere boosted supplies. 8

9 February 2014 Saudi Arabia There has been some mild upward (depreciation) pressure on the Saudi riyal in recent weeks, triggered by the US Fed s tapering announcement. However, as noted above, tapering still means additional dollars, just at a reduced rate. Thus, any pressure on the riyal is unlikely to be sustained, especially given the large stock of net foreign assets which are equivalent to 100 percent of GDP. The country continued to build up this stock of NFA during 2013, though at a reduced rate. There were also occasional monthly drawdowns (albeit small). The weaker pace of NFA accumulation reflects a smaller current-account surplus as oil revenue declined and import spending increased (though at a slower rate than 2012). Nevertheless, the surplus was still very healthy at 17 percent of GDP. The fiscal performance followed a similar pattern, with government revenue down around 9 percent owing to reduced oil revenues. Spending grew by 6 percent, but this was well down on the five year average of 13.6 percent. 9

10 Official figures confirm that government investment spending was cut in 2012, and we think the cut was repeated in Indeed, we are forecasting a further easing in investment spending in given the outlook for oil prices GDP data show the economy expanded by 3.8 percent in real terms, down from 5.8 percent in Much of the slowdown was due to the oil sector, which switched from a positive contribution to a negative one. A weaker pace of government consumption also had an impact. Note that these data were released before the end of the fourth quarter, so should be treated with caution. The pace of bank lending to the private sector continued to decelerate last year, easing to 12.5 percent 10

11 The slowdown in bank lending and import activity is evident in new letter of credit, the value of which fell slightly last year. Most strikingly, imports of building materials fell by over a quarter in 2013, reflecting dislocations in the construction sector following the crackdown on illegal expatriate labour. Still, domestic private consumption remains firm. Retail sales have been volatile, but year-on-year volume growth is still averaging over 20 percent. 11

12 Despite last year s relative weakness, 2014 has started quite brightly, with the overall nonoil PMI registering 59.7 in January, the fastest rate of expansion since October The new orders component was particularly robust, and respondents also noted some improvement in export demand. The recent pickup may well reflect an increased flow of construction orders as bottlenecks caused by the crackdown on illegal labour begin to unwind. 12

13 Firms purchase prices have eased a little. The cost of inputs from EMs should continue to soften in line with weaker EM currencies. Overall input prices have also eased a bit, though they continue to outstrip output prices, which are only just above the breakeven. This suggests that competition among Saudi firms remains as intense as ever. With firms willing to absorb additional costs, the official consumer price index has continued to soften. 13

14 Saudi Arabia: Baseline Macroeconomic Forecast f 2015f 2016f Nominal GDP ($ bn) GDP per capita ($ '000) Real GDP (% change) Hydrocarbon GDP Non-hydrocarbon GDP Nominal GDP (% change) Hydrocarbon GDP Non-hydrocarbon GDP Commercial bank deposits (SR bn) % change Commercial bank loans (SR bn) % change month interbank rate (end year, percent) CPI inflation (% change, average) Hydrocarbon exports ($ bn) % change Current account balance ($ bn) (% GDP) External debt ($ bn) (% GDP) (% current account receipts) Fiscal revenue (SR bn) (% change) Fiscal spending (SR bn) (% change) of which, capital (% change) current (% change) Fiscal balance (SR bn) (% GDP) Public sector deposits with banking system (SR bn) (% GDP) Public sector gross domestic debt (SR bn) (% GDP) Public sector net deposits with banking system (SR bn) (% GDP) Memoranda: Oil price (Brent; $/barrel) Crude oil production ('000 b/d) Net Foreign Assets ($ bn) Foreign liabilities of Saudi banks and non-financial enterprises. Sources: SAMA; Ministry of Finance and National Economy; World Bank; Samba. 14

15 James Reeve Deputy Chief Economist Andrew Gilmour Deputy Chief Economist Thomas Simmons Economist Disclaimer This publication is based on information generally available to the public from sources believed to be reliable and up to date at the time of publication. However, SAMBA is unable to accept any liability whatsoever for the accuracy or completeness of its contents or for the consequences of any reliance which may be place upon the information it contains. Additionally, the information and opinions contained herein: 1. Are not intended to be a complete or comprehensive study or to provide advice and should not be treated as a substitute for specific advice and due diligence concerning individual situations; 2. Are not intended to constitute any solicitation to buy or sell any instrument or engage in any trading strategy; and/or 3. Are not intended to constitute a guarantee of future performance. Accordingly, no representation or warranty is made or implied, in fact or in law, including but not limited to the implied warranties of merchantability and fitness for a particular purpose notwithstanding the form (e.g., contract, negligence or otherwise), in which any legal or equitable action may be brought against SAMBA. Samba Financial Group P.O. Box 833, Riyadh Saudi Arabia 15