Saudi Arabian Economy Economic Research Research Department ARC Research Team, Tel. +966 1 211 9370, devassyp@alrajhi-capital.com Saudi economy continues to improve The recent data released by SAMA indicates a continuous improvement in the Saudi economy. Credit to the private sector climbed for the fourth consecutive month (+0.7% y-o-y; +0.2% m-o-m) in July, while bank claims to the public sector also witnessed a rise (+24.2% y-o-y; +0.9% m-o-m). Further, consumer spending continued to improve with POS transactions (+25.3% y-o-y; -0.6% m-o-m in July) and ATM withdrawals (+12.7% y-o-y; +2.4% m-o-m) witnessing a steady rise on annual basis. Meanwhile, the SAMA foreign reserves have recorded the highest annual growth in over three-and-half years (+1.4% y-o-y; -1.0% m-o-m) in July, as higher oil revenue and recent debt issuances have curbed the government s need to tap its reserves to plug the fiscal deficit. Remittances from Saudi nationals has registered a drop (-32.5% y-o-y) in July; whereas those from non-saudi nationals has increased (+7.9% y-o-y). Meanwhile, cost of living index grew at a faster pace (+2.2% y-o-y; +0.1% m-o-m) in July, on the back of rise in Food & Beverages sector which accounts for nearly one-fifth of the index. We continue to believe that steady oil prices and higher oil output coupled with better non-oil growth will aid the Kingdom s economic recovery this year. Consequently, we revise our oil revenue estimates to SAR605bn (budgeted SAR492bn) and with budgeted non-oil revenue of SAR291bn, the fiscal deficit is expected to be SAR82bn for 2018 (~58% lower than Government budget deficit estimate of SAR194.7bn). In addition, PIF s first commercial loan worth US$11bn is likely to provide a boost to government spending, thereby helping the Kingdom to transform the economy in future. Index of Industrial Production (IIP) climbed 0.6% q-o-q in Q1 2018, supported by the rise in Manufacturing Industry sector (constituting ~23% of the total index). However, the remaining sectors Mining and Quarrying and Electricity Supply witnessed a drop (Figure 4 & 5). Saudi Arabia s 1H 2018 fiscal deficit narrowed to SAR 41.7bn compared to SAR 72.7bn in 1H 2017. For 1H 2018, revenue jumped ~43% y-o-y to SAR 439.9bn, supported by a sharp increase in both oil (+40% y-o-y) and non-oil revenues (+49% y-o-y). Meanwhile, expenditure grew by 26.5% y-o-y to SAR 481.5bn (Figure 2 & 3). (Refer our mid-year fiscal update report: All around improvement Govt. revenues, expenses and fiscal deficit) Saudi PIF has raised US$11bn loan from banks, its first commercial loan, in order to finance country s economic transformation plans. The PIF will pay a margin of 75bps over the LIBOR for the loan. IMF has urged the Kingdom to contain its spending and wage bill amid rising oil prices, as higher spending would negatively impact the Saudi budget in case of an unexpected drop in oil prices. Last month, the IMF raised Saudi Arabia s growth forecast for this year. Kingdom s housing ministry implemented 48 residential projects across the Saudi Arabia via public-private partnerships (PPP), which built 71,700 residential units. Around 68% of the units were built in Jeddah, Riyadh and Dammam. SAMA foreign reserves increased at the fastest annual pace in 44 months (+1.4% y-o-y) in July 2018, as higher oil revenue and recent debt issuances has curbed the government s need to tap its foreign reserves. However, on a monthly basis, reserves slipped (-1.0%) in July (Figure 10 & 11). Meanwhile, government reserves with SAMA stood at SAR 597.8bn (including 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.
government current account) as of July 2018, recording a monthly fall of 2.0%. Credit to the private sector rose 0.7% y-o-y (+0.2% m-o-m) in July, while, bank claims on public sector increased 24.2% y-o-y (+0.9% m-o-m) in the same month. Meanwhile, deposits slipped 1.5% y-o-y (-0.6% m-o-m) in July (Figure 12 & 13). Banking sector profits rose 19.3% y-o-y to stand at SAR 4,758mn in July (-3.5% y-o-y in June). The cumulative banking sector profits for the year (till July 2018) stood at SAR 28,818mn, registering a rise of 9.9% y-o-y. Meanwhile, the non-performing loans have witnessed a steady rise in recent quarters (Figure 16 & 17). Money Supply (M3) dropped 0.8% y-o-y (-0.9% m-o-m) in July to SAR 1,787bn, recording the same yearly rise as the previous month, weighed down by the drop in M2 (-1.6% y-o-y). Meanwhile, as per the weekly money supply data, published by SAMA, M3 may witness an improvement in August (Figure 14). Point-of-sale (POS) transactions jumped 25.3% y-o-y in July (+6.8% y-o-y in June), driven by Restaurants and Hotels (+48.9% y-o-y), Food and Beverage (+28.6% y-o-y) and Clothing and Footwear (+15.1% y-o-y) segments. Meanwhile, ATM transactions rose, after a brief drop last month, by 12.7% y-o-y in July (Figure 7, 8 & 9). Remittances (Personal Transfers) by Saudi nationals declined 32.5% y-o-y in July compared to the rise of 13.3% y-o-y in June, while remittances by non-saudi nationals increased 7.9% y-o-y in the same month (+1.7% y-o-y in June) (Figure 6). Crude oil prices (Brent October futures contract) gained 4.4% m-o-m in August 2018, backed by the fall in US crude oil inventories. Further, reports suggesting a drop in Iranian output also aided oil prices. Meanwhile, crude oil production increased 2.2% m-o-m, to 10.7mbpd in July 2018, compared to the rise of 4.5% m-o-m in June (Figure 20 & 21). Kingdom s non-oil exports rose for the 9 th month in a row, up by 26.7% y-o-y in June 2018 (+14.3% y-o-y in May 2018), whereas the non-oil imports dropped 3.2% y-o-y in June (- 6.4% y-o-y in May 2018) (Figure 22, 23, 24, 25 & 26). Cost of living index (base year 2013) grew at a faster pace of 2.2% y-o-y in July (+2.1% y-oy in June), driven by the Food & Beverages sector which accounts ~19% of the total index. On a monthly basis, the index rose (+0.1% in July) for the second consecutive month (Figure 18 & 19). Crude price outlook: The US Energy Information Administration (EIA) in its August 2018 report estimated Brent crude oil prices to average US$72/barrel for 2018 and US$71/barrel for 2019. Disclosures Please refer to the important disclosures at the back of this report. 2
Figure 1 Key macro indicators Variable Aug-18 Jul-18 Jun-18 2017 2016 Inflation Rate (2007=100) % - 2.2% 2.1% -0.8% 2.1% Aug-18 Jul-18 Jun-18 2017 2016 Average Oil Price (Arab Light) (US$/Barrel) 72.8 74.2 74.3 52.5 41.0 Aug-18 Jul-18 Jun-18 2017 2016 Money Supply (M3) % - -0.8% 0.6% 0.2% 0.8% Total Banking Sector Claims - 4.7 5.4 3.8 9.1 Interbank Interest Rate (3 Month) % 2.610 2.608 2.505 0.88 0.936 Repo Rate % 2.50 2.50 2.50 2.00 2.00 Reverse Repo Rate % 2 2 2.00 1.50 0.75 General Share Price Index (1985=1000) - 19.7 12 0.2 4.3 Q1 2018* Q4 2017* 2017* 2016 GDP Rate at Constant Prices (2010=100) % - 1.2% -1.4% -0.9% 1.7% Q1 2018** Q4 2017* 2016* 2015 Current Account to GDP Ratio (current prices) % - 5.1% 4.3% -3.7% -8.7% Total Imports (fob) to GDP Ratio (current prices)% - 16.4% 16.5% 19.8% 24.3% Non-oil Exports to GDP Ratio (current prices) % - 8.1% 8.0% 7.4% 7.7% Source: SAMA, Bloomberg * Provisional **Estimated. Arab Light and Interbank interest rate data is as on 31 August 2018 and 30 August 2018, respectively. Figure 2 Revenue (SAR bn) 1H 2018 1H 2017 Chg y-o-y Revenue 439.9 308.0 42.82% Oil 298.1 213.0 39.96% Non-oil 141.7 95.0 49.22% Expenditure 481.5 380.7 26.48% Deficit 41.7 72.7-42.68% Source: MoF, Al Rajhi Capital Figure 3 Expenditure (SAR bn) 1H 2018 1H 2017 Chg y-o-y Expenditure 481.5 380.7 26.5% Compensation of Employees 243.8 196.9 23.8% Use of Goods and Services 53.6 44.0 21.9% Financing Expenses 5.7 4.3 32.8% Subsidies 7.2 1.2 511.7% Grants 1.7 1.2 36.7% Social Benefits 44.2 23.2 90.5% Other expenses 51.4 47.7 7.9% Non-Financial Assets (Capital) 74.0 62.3 18.8% Source: MoF, Al Rajhi Capital IIP rose by 0.59% q-o-q in Q1 2018 Index of Industrial Production The Index of Industrial Production (IIP) increased by 0.59% q-o-q in Q1 2018 as against the fall of 1.99% q-o-q in Q4 2017, supported by the rise in Manufacturing Industry sector (constituting ~22.9% of the total index). However, the remaining sectors Mining and Quarrying and Electricity Supply witnessed a drop in Q1 2018 compared to the previous quarter. Disclosures Please refer to the important disclosures at the back of this report. 3
Figure 4 General Index of Industrial Production Index Figure 5 IIP sectors trend 135 134 133 132 131 130 129 128 127 126 125 133.54 131.92 127.95 130.26 134.25 131.58 132.35 190.00 170.00 150.00 130.00 110.00 90.00 171.00 138.37 135.43 131.51 130.91 107.49 161.60 119.36 86.50 181.44 174.68 162.54 157.62 164.60 137.20 121.69 123.20 123.18 121.76 106.12 74.56 124 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 70.00 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 General Index of Industrial Production Index Mining and Quarrying Manufacturing Industry Electricity Supply Remittances from Saudi nationals fell in July 2018 Remittance Remittances (Personal Transfers) from Saudi nationals declined 32.5% y-o-y (+13.3% y-o-y in June) to ~SAR 4.5bn in July 2018, while remittances from non-saudi nationals increased 7.9% y-o-y (+1.7% y-o-y in June) to stand at SAR 12.2bn. Figure 6 Remittances SAR mn 16000 14000 12000 10000 8000 6000 4000 2000 12 10 8 6 4 2-2 0 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18-4 Saudi Non-Saudi Saudi y-o-y change (RHS) Non Saudi y-o-y change (RHS) POS transaction continued to march north in July Consumer spending indicators POS transactions increased at the fastest pace in seven months by 25.3% y-o-y in July 2018 as against the annual rise of 6.8% in June, while the ATM cash withdrawals rose after a brief drop last month, by 12.7% y-o-y in July 2018 (-4.4% y-o-y in June). POS transactions growth can be attributed to the rise in Restaurants and Hotels (+48.9% y-o-y), Food and Beverage (+28.6% y-o-y) and Clothing and Footwear (+15.1% y-o-y) segments. Disclosures Please refer to the important disclosures at the back of this report. 4
Figure 7 Point-of-sale transactions (POS) trend Figure 8 ATM cash withdrawals trend SAR bn 25.0 40% SAR bn 80.0 50% 20.0 15.0 30% 20% 70.0 60.0 50.0 40% 30% 20% 10% 40.0 10% 10.0 0% 30.0 0% 5.0-10% 20.0 10.0-10% -20% - -20% - -30% POS YoY ATM Cash withdrawals YoY Figure 9 Points-of-sale transactions trend by sectors 100.00% YoY change 80.00% 60.00% 40.00% 20.00% 0.00% -20.00% -40.00% Transportation Rest. and Hotels Food & Beverages Cloth. and Footwear SAMA reserves recorded a yearly rise in July SAMA Foreign Exchange Reserves SAMA Foreign Exchange reserves rose at the fastest annual pace in 44 months (+1.4% y-o-y) in July 2018 to stand at SAR 1,880bn (US$ 501.3bn). However, on a monthly basis, reserves dropped by 1.0% in July (+0.4% m-o-m in June). Meanwhile, investment in foreign securities fell 0.8% m-o-m in July compared to the drop of 0.1% m-o-m in June, while foreign currency and deposits abroad slipped 1.4% m-o-m in July as against the rise of 1.4% m-o-m in June. Disclosures Please refer to the important disclosures at the back of this report. 5
Figure 10 Reserves assets SAR bn 3,000 2,500 2,000 1,500 1,000 500 0 2 15.0% 1 5.0% -5.0% -1-15.0% -2 Figure 11 Major components of foreign assets SAR bn 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Reserves Assets YoY (RHS) Foreign Currency & Deposits Abroad Investment in Foreign Assets Private sector credit rose sequentially in July Credit and deposit growth Banking sector credit to the private sector rose on a yearly basis (+0.7% y-o-y) for the fourth consecutive month in July 2018 (+0.2% m-o-m), as against the rise of 0.4% y-o-y (-0.1% m- o-m) in the previous month. Claims on the public sector rose 24.2% y-o-y (+0.9% m-o-m) in July 2018, versus the rise of 32.8% y-o-y (+0.4% m-o-m) in June. However, deposits slipped 1.5% y-o-y in July (-0.6% m-o-m), compared to -1.2% y-o-y (+1.3% m-o-m) in the previous month. Business and Individual deposits, which constitute ~72% of the total deposit base, edged down 0.1% y-o-y (-1.3% m-o-m), whereas Government Entities deposits declined 11.1% y-o-y (+5.8% m-o-m). Figure 12 Credit and deposit growth Figure 13 Loans to Deposits YoY 2 15.0% 86.0% 84.0% 1 82.0% 5.0% 8 78.0% -5.0% 76.0% -1 74.0% Deposits Credit Loan to Deposit Ratio M3 fell for the 2nd straight month in July Money supply Broader money supply (M3) dropped 0.8% y-o-y in July, to stand at SAR 1,787bn, registering the same yearly drop as in June. The drop in M3 can be attributed to the fall in M2 (-1.6% y- o-y). On a monthly basis, the M3 fell 0.9% in July (+1.4% m-o-m in June). As per the weekly money supply data by SAMA, M3 may improve in August. Disclosures Please refer to the important disclosures at the back of this report. 6
Figure 14 Money supply growth (y-o-y) 25.0% 2 15.0% 1 5.0% -5.0% -1-15.0% Figure 15 Deposits break-up SAR bn 1,200 1,000 800 600 400 200 0 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% M1 M2 M3 Time and Saving Deposits (LHS) Time and Saving Deposits (y-o-y) Demand Deposits (LHS) Demand Deposits (y-o-y) Banking sector profits rose in July Banking Sector Banking sector profits advanced, after a brief drop last month, by 19.3% y-o-y in July 2018 (- 3.5% y-o-y in June), to stand at SAR 4,758mn, while the cumulative profits for the year (till July 2018) stood at SAR 28,818mn (+9.9% y-o-y). On a monthly basis, banking sector profits climbed 50.7% in July 2018 (-28.0% m-o-m in June). Figure 16 Non-performing loans (%) Figure 17 Net Profit for Banks 1.9 1.8 1.7 1.6 1.5 1.4 1.4 1.3 1.2 1.1 1.3 1.1 1.2 1.2 1.2 1.2 1.2 1.2 1.3 1.4 1.4 1.4 1.5 1.6 1.7 1.8 SAR mn 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1.0 1,000 500 - Nonperforming loans to total gross loans Cost of living index rose in July Inflation dynamics Cost of living index increased by 2.2% y-o-y in July compared to the yearly rise of 2.1% in June. The Food & Beverage sector (accounting ~18.9% of the index) rose by 6.7% y-o-y (+5.7% y-o-y in June), while the Housing, Water, Electricity & Gas sector (constituting ~25.4% of the index) dropped at a slower pace of 1.3% y-o-y (-1.4% y-o-y in June). On a monthly basis, the cost of living index edged up 0.1% in July same as that in the previous month. The increase in food and beverages inflation corresponds to the POS data in Saudi. Disclosures Please refer to the important disclosures at the back of this report. 7
Figure 18 Inflation trend (y-o-y) Figure 19 Inflation drivers (y-o-y) 5.0% 12.0% 4.0% 3.0% 2.0% 1.0% 3.0% 2.9% 2.8% 2.5% 2.3% 2.1% 2.2% 1 8.0% 6.0% 4.0% 2.0% -1.0% -0.8% -0.8% -0.8% -1.2% -1.1% -2.0% -1.7% -3.0% -2.0% -4.0% -6.0% General Index Food And Beverages Transport Furnishings, Household Housing, Water, Electricity, Gas Crude oil prices rose on a monthly basis in August Crude oil dynamics Crude oil prices (Brent October futures contract) gained 4.4% m-o-m in August 2018, supported by the fall in US crude oil inventories. Further, reports suggesting a drop in Iranian output also aided oil prices. Crude oil production increased 2.2% on a monthly basis, to 10.7mbpd in July 2018, compared to the rise of 4.5% m-o-m in June. On a yearly basis, the crude oil output rose 6.2% in July 2018 as against the rise of 4.0% in last month. Figure 20 Saudi crude oil production trend (mbpd) Figure 21 Crude oil prices trend (US$/bbl) 10.8 10.6 10.4 10.2 10.0 9.8 9.6 9.4 9.2 9.0 8.8 12.0% 1 8.0% 6.0% 4.0% 2.0% -2.0% -4.0% -6.0% -8.0% 85 80 75 70 65 60 55 50 45 40 35 Source: Bloomberg, Al Rajhi Capital Saudi Crude oil production YoY growth Source: Bloomberg, Al Rajhi Capital Brent WTI Arab Light Non-oil exports rose in June Non-oil foreign trade Kingdom s non-oil exports continued to rise in June 2018, up by 26.7% y-o-y, as against the yearly rise of 14.3% in May. The rise can be attributed to the rise in plastics & rubbers (+52.5% y-o-y), accounting 38.9% of the total exports, followed by chemical products (+16.8% y-o-y), constituting 29.9% of total exports. However, non-oil imports dropped 3.2% y-o-y in June 2018, compared to the fall of 6.4% y-o-y last month. The drop was largely due to the fall in imports of transport equipments (-11.6% y-o-y) accounting 16.4% of the total imports. Meanwhile, China was the top export destination and the largest import country in June 2018. Disclosures Please refer to the important disclosures at the back of this report. 8
Figure 22 Non-Oil Exports Commodities (SAR mn) Apr-18 May-18 Jun-18 % y-o-y % m-o-m Plastics & Rubbers 6,421 6,716 6,531 52.5% -2.8% Chemical Products 5,478 5,556 5,016 16.8% -9.7% Ordinary Metals 1,695 1,782 1,407 4-21.0% Transport Equipments 1,357 1,117 1,002-5.5% -10.3% Others 4,605 3,862 2,821 8.5% -27.0% Total 19,556 19,033 16,777 26.7% -11.9% Figure 23 Non-Oil Imports Commodities (SAR mn) Apr-18 May-18 Jun-18 % y-o-y % m-o-m Machinery & Electricals 9,519 9,818 7,622 0.7% -22.4% Transport Equipments 6,746 7,130 5,610-11.6% -21.3% Ordinary Metals 4,150 3,723 3,181 2.6% -14.6% Chemical Products 4,392 4,237 3,448 6.8% -18.6% Others 17,848 19,344 14,344-4.9% -25.8% Total 42,655 44,252 34,205-3.2% -22.7% Figure 24 Non-oil export trend (y-o-y) Figure 25 Non-oil import trend (y-o-y) YoY 7 6 5 4 3 2 8.9% 1-1 -2 0.5% -10.9% 28.0% 5.8% -2.1% 18.2% 17.2% 18.0% 13.1% 35.8% 3.6% 26.5% YoY 6 5 4 3 16.0% 2 1-1 -2-15.5% -3-23.5% -9.8% 2.3% -2.6% -1.1% -3.3% -3.2% -6.4% -1-13.2% -8.2% -3-4 Non-oil Export Non-oil Import Figure 26 Impact of currencies on Weighted-average Saudi imports (m-o-m) * FX movement (USD/Unit) December January February March April May June EUR 0.8% 3.4% -1.8% 1.1% -2.0% -3.2% 0.1% YUAN 1.4% 3.6% -0.7% 0.6% -0.7% -1.2% -2.8% YEN -0.1% 3.2% 2.3% 0.4% -2.8% 0.5% -1.1% FX impact on weighted average imports Germany 0.2% -0.1% 0.1% -0.1% -0.2% China 0.3% 0.7% -0.1% 0.1% -0.1% -0.2% -0.4% Japan NA NA NA NA NA NA NA Source: Bloomberg, GASTAT, Al Rajhi Capital * Out of the 5 top-ranked countries of import, currency of UAE is pegged and so would its variance with the USD and therefore it has been ignored. USD itself is the currency of comparison and so US has also not been taken. Currency movement of Germany, China and Japan has been taken up for analysis. For calculation of weights of the countries of import, data from May has been chosen and assumed constant for preceding period, as consistent data sets is not available for all the countries chosen for analysis. For June 2018, the weights are China (16.1%), Germany (4.8%) and Japan (NA). Data for Japan not given in June. Disclosures Please refer to the important disclosures at the back of this report. 9
Saudi International bond yields with lower maturities fell in August Saudi international bond yields Saudi international bond yields with 30 year maturity rose by 3.9bps m-o-m to 4.876% in August 2018, whereas bond yields with 5 and 10 year maturities dropped by 9.5bps and 3.7bps, respectively to 3.423% and 3.989%. Figure 27 International Bond Yields 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Source: Bloomberg, Al Rajhi Capital 30 Yr 10 Yr 5 Yr Major currencies fell on a monthly basis against the USD in August Exchange Rates On the forex front, except Japanese Yen most major currencies (Chinese Yuan, British Pound, Euro, Australian Dollar and the Canadian Dollar) fell on a monthly basis as against the US Dollar in August 2018. Figure 28 Monthly Change (%) against the US Dollar 1.5% 1.0% 0.5% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% Japan Canada Europe China UK Australia Monthly Change (%) against USD Source: Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 10
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