READY TO START SAUDI 2017 BUDGET, LUNCHING TRANSFORMATION PHASE

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December 30, 2016 [ B U D G E T C O M M E N TA R Y - 2 0 1 7 A N D E C O N O M I C P E R F O R M A N C E 2 0 1 6 ] READY TO START SAUDI 2017 BUDGET, LUNCHING TRANSFORMATION PHASE» On the 22nd of December, Saudi Arabia unveiled another expansionary budget for the fiscal year of 2017 after Council of Ministers approval, predicting a 6% increase in state expenditure in 2017 to a record of SAR 890 billion ($237 billion). 2017 Budget is suggesting the largest year on year increase in spending since 2013.» The announced Budget sent a clear message about the country s ability to weather the oil prices shocks, another important message has been sent to private investors as the expansionary stance of 2017 budget was critical to restore confidence for both consumers and investors.» We believe that 2017 is set to be a solid performance year as the government is committed to support economic activities by using its resources in a very efficient manner. SAUDI ARABIA REVENUES & EXPENDITURE TARGETS 2017 ALLOCATION 2016 *ALLOCATION Y/Y A. REVENUES (SAR Million): OIL REVENUES 480,000 69.4% 333,803 65.0% 43.8% OTHER REVENUES 212,000 30.6% 180,000 35.0% 17.8% T O T A L 692,000 513,803 34.7% B. EXPENDITURES (SAR Million): HUMAN RESOURCE DEVELOPMENT 200,329 22.5% 207,145 24.7% (3.3%) ECONOMIC RESOURCE DEVELOPMENT 47,261 5.3% 36,798 4.4% 28.4% HEALTH & SOCIAL DEVELOPMENT 120,420 13.5% 124,835 14.9% (3.5%) INFRASTRUCTURE & TRANSPORTION 52,164 5.9% 30,827 3.7% 69.2% MUNICIPAL SERVICES 47,942 5.4% 34,687 4.1% 38.2% DEFENCE & SECURITY 287,541 32.3% 281,494 33.5% 2.1% PUBLIC ADMINISTRATION AND OTHER 26,716 3.0% 28,464 3.4% (6.1%) PUBLIC PROGRAMS UNIT 107,627 12.1% 95,750 11.4% 12.4% T O T A L 890,000 840,000 6.0% EXPECTED SURPLUS / (DEFICIT) (198,000) (326,197) (39.3%) ( EXPENDITURES AFTER DISTRIBUTING THE UN ALLOCATED BUDGET)

TREASURY RESEARCH BUDGET COMMENTARY 2017 30 DEC 2016 PAGE 2 BETTER THAN EXPECTED 2016 [DEFICIT]. The Saudi government which expected a budget deficit of SAR 326 billion (the largest ever), emerged from 2016 with a less deficit (2016 budget deficit is expected at SAR 297 billion) owing to increases in revenues and decreases in expenditures. Excluding due payment from previous fiscal years, Saudi government spending is expected at SAR 825 billion in 2016 (compared to SAR 840 Billion anticipated by the Ministry of Finance at the beginning of the year). Saudi government spending is expected in 2016 at SAR 825 billion... SERIOUS FISCAL CONSOLIDATION (THE PREPARATION YEAR) Saudi government moved actively to protect fiscal balances from oil prices decline by applying a greater control over spending, reviewing and reprioritizing existed and new projects. A short-term strategy aimed at rationalizing government spending. Subsidies on fuel, electricity and water have been reduced in 2016 [full energy subsidies to be eliminated by 2020]. Moreover, several nonoil revenues measures have been implemented to diversify the source of revenues away from oil. The government successfully raised the share of non-oil revenues as a percentage of total revenue in 2016 to 37.75% (the highest since 1998). Notwithstanding the consolidation efforts, the fiscal deficit is projected to remain high. 2016 budget deficit is the second largest budget deficit ever after the SAR 365.8 billion of 2015. REVENUE - 2016 Total 2016 revenues are expected at SAR 528 billion (2.7% higher than a SAR 514 billion projected at the beginning of the year according to the budget report released by the Ministry of Finance (MOF)), thanks to non-oil revenues. The increase in returns on SAMA s assets, Visa taxes, tobacco Tariffs and telecom fees were the main drivers behind the rally of non-oil revenues in 2016, the detailed non - oil table showed. Non -oil revenues (37.7% of total Revenue) rose from SAR 165.9 billion in 2015 to SAR 199 billion in 2016. Subsidies have been reduced... ACTUAL REVENUES & EXPENDITURES SAUDI RIYAL BILLION REVENUES & EXPENDITURES SAUDI RIYAL BILLION 1,400 REVENUES (LHS) EXPENDITURES (LHS) SURPLUS / DEFICIT(RHS) 600 1,400 REVENUES (LHS) EXPENDITURES (LHS) SURPLUS / DEFICIT (RHS) 600 1,200 1,000 400 1,200 1,000 400 800 200 800 200 600 600 400 0 400 0 200 (200) 200 (200) 0 0 (200) (400) (200) (400) 2003 2005 2007 2009 2011 2013 2015 2017 2003 2005 2007 2009 2011 2013 2015 2017 SOURCE : MOF BANK ALBILAD TREASURY DIVISION SOURCE : MOF BANK ALBILAD TREASURY DIVISION

TREASURY RESEARCH BUDGET COMMENTARY 2017 30 DEC 2016 PAGE 3 Total oil revenues, however, came at SAR 329 billion ($87.7 billion), 26% lower than 2015 level (and1.2% lower than the projected value). For the purpose of budget preparation Ministry of finance usually uses a conservative oil price in estimating its oil revenues. However, in 2017, MOF referred to two possible scenarios for Saudi oil prices. The first scenario (the conservative scenario) for oil prices in 2017 was 49 per barrel and the second scenario was $55 per barrel (the base scenario). PUBLIC DEBT AND CREDIT RATING EFFECT To help ease a fiscal squeeze from the decline of oil prices and to help close the widening budget gap, Saudi government borrowed from local and international markets, the total value of debt issued during the 2016 fiscal year reached SAR 200.1 billion. To limit crowding out private sector credit domestically, Saudi government turned to international debt markets, borrowing ($10 billion) through a syndicated loan facility from foreign banks and ($17.5 billion) from issuing international bonds. Saudi Arabia s outstanding debt (domestic and international) stood at SAR 316.5 billion in December 2016, 122.8% higher than 2015 levels. Saudi debt to GDP level continued to be the lowest among its peers even in 2016 (G20 as example). During 2017, Saudi government is projected to fund part of its deficit by borrowing from local and international markets. Oil revenues fell to SAR 329 billion in 2016. Saudi government turned to international debt market to limit crowding out private sector credit... National debt strategy for the next four years (2017-2020) should follow the following principles: Starting with the accepted Debt/GDP ratio, government suggests a 30% Debt/GDP ratio as a threshold not to be exceeded. At the same time, the government is seeking to enhance its credit rating profile by two notches to AA2 [The current Long term ranking by Moody s is A1]. Diversifying the type of debt to include issuing Sukuk, locally and internationally will also be one of the principles to achieve the country s Medium Debt Management Strategy. SAUDI PUBLIC DEBT ROSE FOR THE SECOND FISCAL YEAR PERCENTAGE 2016 DATA ARE PRELIMINARY DEBT TO GDP SELECTED COUNTRIES PERCENTAGE (LAST) GROSS DEBT / GDP 31 26 25.83 USA 123.33% UK 88.21% GERMANY 74.9% TURKEY 39.53% 21 16 17.12 12.06 13.99 13.20 MEXICO 42.1% CHINA 15.04% JAPAN 266% 11 6 1 8.45 5.40 3.05 2.15 1.57 5.82 SAUDI ARABIA 13.2% UAE 15.68% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 SOURCE : MOF SAMA BANK ALBILAD TREASURY DIVISION SOURCE : BLOOMBERG BANK ALBILAD TREASURY DIVISION

TREASURY RESEARCH BUDGET COMMENTARY 2017 30 DEC 2016 PAGE 4 MACROECONOMIC PERFORMANCE 2016 Most recently, General Authority of Statistic (GASTAT) released its preliminary estimation for GDP growth in 2016 and the revised reading for GDP growth in 2015. Indicators showed Saudi economy has grown by its slowest pace since 2009. GDP grew in Saudi Arabia in real term by 1.4% Y/Y to SAR 2.581 billion compared to 4.11% growth in a year earlier (REVISED UP FROM %3.59) Private sector real GDP barely grew in 2016, reflecting the pace of domestic economic activities has slowed in the previous year. Private sector real GDP grew by 0.1% Y/ Y in 2016 (the lowest since 1987). Private sector contribution to GDP growth in 2016 was very close to zero (0.04%). Private sector remained cautious last year about committing to new investments. In General, total spending on Fixed Capital formation dropped significantly in 2016 mainly due to the uncertainty about oil prices fluctuations. Government sector grew by 0.5% in real term according to a preliminary data by GASTAT, well below last year s expansion and the lowest since 1988 (0.36%). Oil sector real GDP grew by 3.4% Y/Y in 2016, slower than a year earlier at 5.3%. However, oil sector contributed by almost 100% of the 1.4% real GDP growth in 2016. Oil production in the first ten months to October rose by 2.3% compared to same period last year. YEAR AHEAD: (THE TRANSFORMATION YEAR) The fiscal consolidating approach that was adopted by the government in 2016 puts the state s fiscal stance on a more sustainable footing in years to come (more precisely 2017-2020). We believe that 2016 reform programs had set the stage for implementing the National Transformation Program (NTP). The Saudi economy real GDP grew by 1.4% Y/Y in 2016. The fiscal consolidating approach puts Saudi Arabia on a more sustainable footing in years to come. 2017 SAUDI BUDGET SECTOR ALLOCATION PERCENTAGE OF TOTAL EXPENDITURE CONTRIBUTION TO GDP GROWTH PERCENTAGE PUBLIC PROGRAMS UNIT 12% PUBLIC ADMINISTRATION AND OTHER 3% HUMAN RESOURCE DEVELOPMENT 23% 12% 9% OIL SECTOR PRIVATE SECTOR GOVT. SECTOR GROSS DOMESTIC PRODUCT 11.2% 12% 10.0% 9% 8.0% DEFENCE & SECURITY 32% ECONOMIC RESOURCE DEVELOPMENT 5% 6% 3% 5.6% 2.8% 1.8% 6.2% 4.8% 5.7% 2.7% 3.7% 4.1% 1.4% 6% 3% HEALTH & SOCIAL DEVELOPMENT 14% 0% (3%) (2.8%) (2.1%) 0% (3%) MUNICIPAL SERVICES 5% INFRASTRUCTURE & TRANSPORTION 6% (6%) 2002 2004 2006 2008 2010 2012 2014 2016 (6%) SOURCE : MOF SAMA BANK ALBILAD TREASURY DIVISION SOURCE : MOF BANK ALBILAD TREASURY DIVISION

TREASURY RESEARCH BUDGET COMMENTARY 2017 30 DEC 2016 PAGE 5 For the 2017 fiscal year, Saudi government endorsed another expansionary budget, indicating its commitment to boost the economic activities. 2017 budget projected an 8% increase in government spending to SAR 890 billion ($237 billion) - compared to the actual expenditure at SAR 825 billion in 2016 and 6% increase compared to the projected numbers at SAR 825 billion. The focus of spending remains on security, education, health care, infrastructure and transportation, however, the huge share of 2017 spending increase will come from spending on the Government s National Transformation Program (NTP). In 2016, Saudi Arabia allocated 9 billion to cover the cost of the NTP initiatives. Next year, though, the budget allocated SAR 42 billion to support the program and SAR 217 billion to be allocated from 2018 to 2020 (SAR 72 billion yearly average for the next three years). And here are some of the key areas of priority emphasized by 2017 budget statement: PUBLIC ADMINISTRATION (DETAILS IN THE TABLE BELOW) The budget for this sector includes projects, programs and a 46 new initiatives to help implementing the NTP 2020 related to different ministries by enhancing the performance of these ministries. PUBLIC ADMINISTRATION AND OTHER 26,716 28,464 26,770 ( 6.1%) ( 6.0%) MILITARY, SECURITY & REGIONAL ADMINISTRATION (DETAILS IN THE TABLE BELOW) The budget for this sector includes new projects and supports expansion of existing ones to boost military, institution and housing capabilities. In the security sector, the budget allocated funds for new and existed projects at the ministry of interior and its security entities. DEFENCE & SECURITY 287,541 281,494 305,723 2.1% 8.6% MUNICIPALITY SERVICES (DETAILS IN THE TABLE BELOW) The allocated fund will be used to support different existing and new projects and initiatives including Enterprise Management System and Municipal Waste Management System (cost of NTP related projects has been allocated SAR 4 billions). MUNICIPAL SERVICES 47,942 34,687 24,961 38.2% ( 28.0%)

TREASURY RESEARCH BUDGET COMMENTARY 2017 30 DEC 2016 PAGE 6 HUMAN RESOURCES DEVELOPMENTS (EDUCATION & TRAINING) Spending on education will cover qualitative and quantitative aspects of the sector. Funds have been allocated to build new educational facilities and schools, renovate girls college. More funds have been allocated to the public education development project and scholarship program. HUMAN RESOURCE DEVELOPMENT 200,329 207,145 205,826 ( 3.3%) ( 0.6%) HEALTH & SOCIAL DEVELOPMENT (DETAILS IN THE TABLE BELOW) The budget for Health sector includes completing the construction of new hospitals and health centers across the Kingdom. With regards to social services, the budgets includes the development of sports cities. HUMAN RESOURCE DEVELOPMENT 200,329 207,145 205,826 ( 3.3%) ( 0.6%) ECONOMIC RESOURCES & GENERAL PROGRAM (DETAILS IN THE TABLE BELOW) 2017 budget has allocated funds for new water and sanitation projects, building dams and drilling wells, expanding the infrastructure of industrial cities and spending on projects approved during previous fiscal years. ECONOMIC RESOURCE DEVELOPMENT 47,261 36,798 38,248 28.4% 3.9% INFRASTRUCTURE & TRANSPORTATION (DETAILS IN THE TABLE BELOW) The sector s budget includes projects and programs for 116 initiatives to develop roads, ports, railway, airports, postal services and the industrial cities of Jubail & Yanbu and Ras AlKhair industrial Mining. INFRASTRUCTURE & TRANSPORTION 52,164 30,827 37,584 69.2% 21.9%

TREASURY RESEARCH BUDGET COMMENTARY 2017 30 DEC 2016 PAGE 7 REVENUES 2017 Budgetary revenues are projected at SAR 692 billion in 2017, 31% higher than the previous year budget, reflecting higher oil and non-oil revenues. Oil revenues are estimated at SAR 480 billion (69.4% of total revenues), 46% higher than actual oil revenues in the previous years. Nonoil revenues are set to increase by 6.5% to SAR 212 billion. The recent fiscal reforms played critical role in improving non-oil revenues. Last year, Saudi government announced important plans to raise nonoil revenues like increasing government fees and introducing a value added taxes (VAT). Some of these plans have already been implemented (like the increase in Visa taxes), new fees have been introduced for the 2017 fiscal year. Furthermore, a GCC wide 5% VAT has been committed to start in 2018. Implementing a wide-scale fiscal reforms with no doubt will improve the short to medium term fiscal outlook in the region s largest economy (Saudi Arabia). GLOBAL ECONOMIC OUTLOOK AND OIL DYNAMICS. Global economic activities have improved in the second half of 2016, with global economy has been projected to grow by 3.1% in 2016. The strength is expected to continue in 2017, although remaining below 2008-2009 levels. Though Advanced Economies are facing serious challenges [Political uncertainty in the US, Moderate pace expansion in Japan, High uncertainty in the UK related to its future relationship with the EU], Economic fundamentals got some momentum recently. Business sentiments have gradually increased since September, Manufacturing and Services PMI climbed gradually in the USA, Europe, and China. Implementing a wide-scale fiscal reforms with no doubt will improve the short term fiscal outlook... The strength in global economic activities is expected to continue in 2017.. Most recently, OPEC countries reached an agreement to reduce oil production to 32.5 MB/D in early 2017, from an estimated 33.6 MB/D in October 2016. OPEC PRODUCTION BY COUNTRY WITH CAPACITY THOUSAND BARRELS PER DAY KB/D WEEKLY CLOSING CRUDE OIL USD PER BARREL 12,100 NOV OCT 150 NYMEX WTI Crude Weekly closing Dec 23 CLOSE $53.02 ICE Brent Crude Weekly closing Dec 23 CLOSE $55.16 11,500 10,100 8,100 CAPACITY KB/D 130 110 90 6,100 4,100 2,100 100 4,700 4,000 3,150 3,000 2,500 2,200 1,870 1,150 780 780 740 555 KSA IRAQ IRAN UAE KUW VEN NIGER ANGO ALGER LIBYA QATAR INDON ECUAD 70 50 30 10 Dec-12 Aug-13 Apr-14 Dec-14 Aug-15 Apr-16 Dec-16 SOURCE : MOF BANK ALBILAD TREASURY DIVISION SOURCE : BLOOMBERG BANK ALBILAD TREASURY DIVISION

TREASURY RESEARCH BUDGET COMMENTARY 2017 30 DEC 2016 PAGE 8 The agreement pushed up oil prices above $50 per barrel. Production in the United States is expected to decline by 0.2 MB/D according to the recent OPEC report. On the other hand, change in energy regulations in the US (a promise made by the President elect) will definitely reduce the production costs suggesting the expected recovery in oil prices will be gradual [crude oil prices are expected to increase to the $56-$62 range for Brent between 2017-2019]. MACROECONOMIC OUTLOOK 2017 (SAUDI ARABIA) The budget doesn t set a growth assumption for 2017 in the kingdom of Saudi Arabia. However, we believe that 2017 is set to be a solid performance year as the government is committed to support economic activities by using its resources in a very efficient manner. AT its last Word Economic Outlook (WEO) report, the IMF update maintained the Saudi Economy s growth rate at 1.2% in 2017. However, given the recently released budget and the more sustainable path of oil prices after the OPEC deal, we believe Saudi Fundamentals will push to a higher growth rate in 2017. we believe that 2017 is set to be a solid performance year as the government is committed to support the economy

TREASURY RESEARCH BUDGET COMMENTARY 2017 30 DEC 2016 PAGE 9 THE BUDGET COMMENTARY REPORT IS PREPARED & EDITED BY: ABDULKARIM I. ALKADRI Research Senior Analyst +966 11 479 8297 +966 54 2188 565 aialkadri@bankalbilad.com TREASURY CONTACT LIST SAMER M.A. FARHOUD General Manager - Treasury Division +966 11 479 8288 Sm.farhoud@Bankalbilad.com SAJJAD HUSSAIN Chief Dealer +966 11 479 8588 S.hussain@bankalbilad.com FOREIGN EXCHANGE +966 11 479 8282 +966 11 479 8888 Ext. 9424 Fxdesk@bankalbilad.com MONEY MARKET +966 11 479 8935 +966 11 479 8888 Ext. 9427 MMDesk@bankalbilad.com SALES & BANKNOTES +966 11 479 8880 Salesdesk@bankalbilad.com TREASURY SUPPORT +966 11 479 8270 Halosaimi@bankalbilad.com DISCLOSURE APPENDIX ANALYST DISCLAIMER Research analyst (s) responsible for the content of this research report certify that the views expressed and attributed to the research analyst (s) in the research report accurately reflect their personal views about the subject matters discussed. No part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the research report. The views of the author (s) do not necessarily reflect the views of Bank Al Bilad and are subject to change without notice. ADDITIONAL DISCLOSURES This report is dated as at 30 December 2016. All market data included in this report are dated as at close 22 December 2016, unless otherwise indicated in this report. DISCLAIMER This report is prepared for information purpose only. It should not be construed as an offer to sell or a solicitation of an offer to purchase or subscribe to any investment. Although the information contained in this report is obtained from many sources believed to be reliable, Bank Al Bilad does not guarantee its completeness or accuracy. To the extent permitted by applicable laws and regulations in the Kingdom of Saudi Arabia, neither Bank Al Bilad nor any of its affiliates, their directors, officers and employees will be liable or have any responsibility of any kind for any loss or damage that may be incurred as a result of using the information contained in this report.