Saudi Arabian economy Economic Research March 214 Research Department Md. Rahmatullah Khan, Economic analyst Tel: +966 11 211 9319, khanmr@alrajhi-capital.com Saudi Arabian Economy Saudi Arabia s sovereign rating was upgraded by Fitch Ratings from AA- to AA with Stable outlook on strong fundamental factors. This will lead to upgrade of selective corporate ratings in the future, which were capped due to lower sovereign rating. On a separate note, the Saudi government, in its efforts to diversify the economy, announced the creation of a new investment company with a capital of SAR2bn to invest in industries with a comparative advantage. This will be an additional government specialized credit institution (GSCI), and will be owned by PIF (5%), Sabic (25%) and Aramco (25%). The existing GSCIs have played a crucial role in supporting the growth and diversification in recent years, especially in the post economic crisis period. Net lending of these institutions has been around 3% of the commercial banks lending between Q1 29 and Q3 213, while the loan outstanding stood at 24% of that of commercial banks at the end of Q3 213. The domestic oil production trended downward in February from a revised up production in January. Non-oil exports continued its growth momentum in January, whereas total imports remained weak. Inflation moderated further while monetary indicators remained largely stable. Credit rating upgraded Fitch Ratings upgraded Saudi Arabia s sovereign credit rating from AA- to AA with Stable outlook. The rating has been upgraded on account of robust growth, especially in the non-oil sector, strong fundamental factors such as almost negligible general government debt, foreign reserves of 1% of GDP, strong fundamentals of the banking sector and labor reforms that have boosted the locals employment in the private sector. The rating agency highlights two major risks 1) a material erosion of fiscal and external buffers, stemming from a prolonged period of sharply lower oil prices or rapid growth in the fiscal breakeven oil price, and 2) spillover from regional conflicts or a domestic political shock that threatens stability. However, according to the agency, risks are balanced with an upside potential that emanates from the ongoing efforts to tackle the weakness in structural indicators and economic policy framework, enhancing business environment in ways conducive to diversification of the economy & revenue base. Crude production OPEC s preliminary estimate suggests that Saudi Arabia s crude production trended downward in February from an upwardly revised number in January. The estimated production stood at 9.625mbpd in February as compared to a revised production estimate of 9.727 mbpd in January. The domestic production has been declining at a slower pace in spite of continued supply disruption in Libya and other countries, mainly due to rising non-opec supply. The crude production again dipped in Libya to just 341, bpd in February from 516, bpd in January. The average domestic production in the first two months of 214 stood at 9.67 mbpd as compared to the average production of 9.1 mbpd over the same period last year. However, the average Brent crude price in the first three months of 214 stood at US$17.8 per barrel as compared to US$112.6 per barrel over the same period a year ago. Non-oil foreign trade Non-oil exports continued its momentum registering a YoY growth of 12.7% in January, mainly driven by exports of plastics, rubber and their ancillary products that jumped 28% YoY. Exports of chemical products remained in a downward trend, declining 3.7% YoY. Exports of transport equipment and their ancillary products jumped from SAR477mn in January 213 to SARSAR1,689mn in January 214. On the other hand, the total imports remained in a declining trend for the third consecutive month. Imports declined by 9.5% YoY in January mainly due to a decline in the top two import categories. The imports of machinery & equipment declined 12.6% YoY, while the imports of transport equipment fell by 21% YoY. Disclosures Please refer to the important disclosures at the back of this report. 1
March 214 Inflation remained on moderating trend Credit growth seems to have stabilized, while deposits growth outpaced it for the second month in a row Inflation Consumer inflation moderated further to 2.8% YoY in February, mainly due to moderation in food inflation (4.6% in February vs 5% in January) and price decline in clothing & footwear (-.4%) and miscellaneous goods (-.4%). The cost of transport also declined by 2.7% YoY, sixth monthly decline in a row. On the other hand, rent, water and electricity inched up slightly to 4% in February from 3.7% in January. Monetary and credit developments Credit to private sector from commercial banks expanded at a slightly lower rate, 12.2% YoY in February (vs 12.3% YoY in January). Loans, advances and overdrafts increased 11.8% YoY while commercial banks investment in private securities jumped 23.4% YoY. On the other hand, deposits growth outpaced credit growth for the second month in a row. The deposit growth was 13.9% YoY in February which was also higher as compared to the 13.3% YoY in January even though demand deposits slowed down to 15.7% from 17.3%. However, total deposits was boosted by other quasi monetary deposits that jumped 17.8%, and supported by the time & savings deposits that grew 7.3% YoY (vs 5.3% in January). Slower demand deposits growth resulted into slower M1 and M2 growth. However, sharp jump in other quasi monetary deposits pushed broader measure of money supply, M3 growth higher at 13.2% YoY in February as compared to 12.8% YoY in January. Figure 1 Deposits have picked up Figure 2 while money supply remains in a range 18% 16% 14% YoY 35% 3% YoY 12% 25% 1% 2% 8% 6% 4% 15% 1% 2% 5% % % Credit growth Deposit growth M1 M2 M3 Source: SAMA, Al Rajhi Capital Source: SAMA, Al Rajhi Capital Government created another credit company with paid-up capital of SAR2bn which plans to invest SAR7.45bn in the next five years Existing government credit institutions have played an important role in supporting economic activities in the post economic crisis period An addition to the government specialized credit institutions (GSCIs) The Saudi government has created a new public finance company Saudi Arabian Industrial Development Company infusing a capital of SAR2bn to invest in industrial projects in the country. The Public Investment Fund will contribute 5% of the capital, while SABIC and Aramco will contribute 25% each. The new company will invest around SAR7.45bn over the next five years in petrochemicals, plastics, iron & steel, aluminum and other basic industries. This is a new initiative by the government as it has many specialized credit institutions that provide credit to different sectors of the economy. The government specialized credit institutions namely Real Estate Development Fund (REDF), Saudi Industrial Development Fund (SIDF), Public Investment Fund (PIF), Saudi Credit & Savings Bank (SCSB) and Agricultural Development Fund (ADF) continue to play a crucial role in supporting the investments in the Saudi economy. The impressive loan growth, especially after the 28-9 global economic crisis underlines the fact that the government has not only supported the economic activities through direct spending, but also ensured credit availability through these specialized credit institutions. The gross disbursement from these institutions has Disclosures Please refer to the important disclosures at the back of this report. 2
Q1-96 Q4-96 Q3-97 Q2-98 Q1-99 Q4-99 Q3- Q2-1 Q1-2 Q4-2 Q3-3 Q2-4 Q1-5 Q4-5 Q3-6 Q2-7 Q1-8 Q4-8 Q3-9 Q2-1 Q1-11 Q4-11 Q3-12 Q2-13 Mar-97 Dec-97 Sep-98 Jun-99 Mar- Dec- Sep-1 Jun-2 Mar-3 Dec-3 Sep-4 Jun-5 Mar-6 Dec-6 Sep-7 Jun-8 Mar-9 Dec-9 Sep-1 Jun-11 Mar-12 Dec-12 Sep-13 Economic Research March 214 been SAR188bn since the start of 29 through September 213, while the net increase in lending was at SAR113bn. This is around 3% of commercial banks net lending to the private sector over the same period. Moreover, the total outstanding loans of these institutions stood at SAR269bn at the end of Q3 213, which was also 24% of commercial banks total loans outstanding. Figure 3 Sharp growth in lending from GSCIs in recent years 28 YoY 25% 26 2% 24 15% 22 1% 2 5% 18 % 16 14-5% 12-1% Figure 4 amid slower growth in lending from banks 12 YoY 1 8 6 4 2 45% 4% 35% 3% 25% 2% 15% 1% 5% % 1-15% -5% Outstanding loans Growth - rhs Banks' claims on private sector Growth-rhs Source: SAMA Q4-213 Bulletin, Al Rajhi Capital Source: SAMA, Al Rajhi Capital Their assets have grown sharply in the last few years, and still remains fairly liquid Assets and paid-up capital: The assets of these institutions have also grown sharply in recent years in line with the sharp rise in lending activities. The total assets reached SAR575bn in Q3 213, mainly comprising loans, monetary assets (deposits with SAMA and commercial banks) and investments. More than two-thirds of the assets are in loans and investments, whereas the remaining is mainly deposited with SAMA and commercial banks. The large liquid assets of these institutions provide room to continue additional lending, if needed. Moreover, the government has increased the paid-up capital of these institutions in recent years, almost doubling since early 29 which will also support lending activities. Figure 5 Fairly liquid balance sheet 3 25 2 15 1 5 7 6 5 4 3 2 1 Figure 6 and higher paid-up capital 5 45 4 35 3 25 2 15 1 5 Dep. With SAMA Loans Total Assets-rhs Deposits with Local Banks Investments Paid-up capital Source: SAMA Q4-213 Bulletin, Al Rajhi Capital Source: SAMA Q4-213 Bulletin, Al Rajhi Capital, REDF has disbursed SAR5.2bn every quarter since Q3-211 through Q3-213 Real Estate Development Fund: The Real Estate Development Fund lends citizens to own housing units in the country. Since the housing sector has been one of the prime focus areas of the government in recent years, the fund has witnessed a sharp rise in lending. Lending from the fund has accelerated since 211 when the government announced many measures to provide affordable housing to citizens. Loans outstanding have increased from SAR75bn in Q3 211 to SAR114bn in Q3 213 even as repayment remained good. The average quarterly gross disbursement stood at Disclosures Please refer to the important disclosures at the back of this report. 3
March 214 SAR5.2bn, while the repayment averaged SAR824mn every quarter over the same period. Both gross disbursement and net lending peaked in Q1 213, and have declined steadily since then. However, they remained significantly higher than the levels prior to Q3 211. Figure 7 Lending from REDF surged since 211 7 6 5 4 3 2 1-1 Source: SAMA Q4-213 Bulletin, Al Rajhi Capital, PIF direct lending activities have increased sharply in recent years Public Investment Fund: The Public Investment Fund (PIF) is one of the unique specialized funds that invests in large commercial, transportation and other manufacturing projects as well as invest in stocks through primary and secondary markets. The fund has also stepped up lending and investments after the economic crisis period. The total loan outstanding has jumped from SAR29bn at the end of 28 to SAR76bn in Q3 213. The average quarterly growth disbursement stood at SAR3.3bn, while the repayment stood at SAR839mn over the same period. It may be noted that these figures do not include direct investments in projects, equities and ownerships of companies. Figure 8 Lending from PIF has been higher in the post economic crisis period 15 1 5-5 -1-15 Source SAMA Q4-213 Bulletin, Al Rajhi Capital, SIDF loan outstanding jumped from SAR17bn in 29 to SAR28bn at the end of Q3-213 Saudi Industrial Development Fund: The Saudi Industrial Development Fund provides loans to industries over medium to long term. The total loan outstanding has increased from SAR17bn at the start of 29 to SAR28bn at the end of Q3 213. However, the increase in net outstanding has stagnated in the last two years or so, mainly because of repayments. The gross disbursement was SAR1.8bn between Q1 211 and Q3 213, while the repayment amounted to SAR1.4bn, resulting in almost Disclosures Please refer to the important disclosures at the back of this report. 4
March 214 stagnant net lending. Having said that, the fund has a paid-up capital of SAR4bn providing ample room for lending growth. Figure 9 Net lending has stagnated due to repayments 35 3 25 2 15 1 5-5 -1-15 Source: SAMA Q4-213 Bulletin, Al Rajhi Capital, Saudi Credit & Saving Bank: The Saudi Credit & Saving Bank provides interestfree loans to individuals, small and medium scale enterprises & employers. The bank provides interest-free personal loans to low income people with easy conditions. The bank supports entrepreneurship by granting up to SAR2, to individuals possessing a vocational degree to start an enterprise. Moreover, the bank also provides taxi & bus loans. SCSB gross disbursement averaged SAR2bn per quarter during Q1-28 to Q3-213 Although the bank was established in 1971, its activities picked up just a few years ago. The bank s lending pace increased significantly after the economic crisis period. The total loan outstanding touched SAR27bn at the end of Q3 213 from almost negligible levels in 28. The gross disbursement has been around SAR2bn per quarter since Q1 28 through Q3 213, peaking above SAR6bn during Q1 Q2 211 when the government announced a large number of social benefit measures for its citizens. At the same time, the repayment also remained decent, averaging SAR1bn per quarter between Q1 28 and Q3 213. Figure 1 Lending activity picked up in the post economic crisis period 1 8 6 4 2-2 -4 Source SAMA Q4-213 Bulletin, Al Rajhi Capital, Disclosures Please refer to the important disclosures at the back of this report. 5
March 214 Agricultural Development Fund: The Agriculture Development Fund was established to support credit facilities to agriculture and related sectors such as animal husbandry & poultry. The activities of ADF largely remained muted as compared to other specialized credit institutions in the country. The loan outstanding has declined slightly from SAR1bn in 21 to SAR8bn in Q3 213. The quarterly net lending largely remained negative as the gross disbursement lagged repayments. Figure 11 ADF s lending activity remains muted as compared to other GSCIs 8 6 4 2-2 -4-6 Source: SAMA Q4-213 Bulletin, Al Rajhi Capital, Disclosures Please refer to the important disclosures at the back of this report. 6
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