Research Department ARC Research Team Tel. +966 11 211 9449, alsudairim@alrajhi-capital.com Saudi Arabian Economy Saudi economy: Reforms on track The Government announced an increase in gasoline prices today, part of the economic reforms post the hike in electricity tariff,introduction of VAT, and citizen account program, affirming its commitment on fiscal balance program and Vision 2030. Economic indicators appear to be stable with SAMA data showing that reserve assets grew marginally in November (+0.2% m-o-m), rising for the second consecutive month. Meanwhile, credit to the private sector was broadly flat (-0.3% m-o-m), while lending to the government entities grew (+2.3% m-o-m). Total deposits slipped marginally (-0.1% m-o-m) due to decline in time & saving deposits, even while demand deposits grew. As a result, LDR ratio eased to 82 (October: 82.46). POS transactions grew 10.1% y-o-y due to lower spending last year on account of the cut in public sector allowances. Cost of living rose for the first time in 11 months (+0.1% y-o-y). Inflation is likely to rise further in coming months on the back of the low base of last year, the announced hike in electricity prices, fuel prices and implementation of VAT. The preliminary real GDP data showed that the economy contracted 0.74% y-o-y, mainly due to the cut in oil production, even though the non-oil growth accelerated (+1.01% y-o-y). The trend in non-oil economy is expected to continue with the government announcing its biggest ever budget for 2018, increasing spending to SAR 978bn, 5.6% higher than the expenditure (prelim.) in. Hike in gasoline prices: The government increased the prices of gasoline effective Jan 1, 2018. In-line with the fiscal balance program objectives, the gasoline prices were hiked to ensure rationalization of the consumption. Octane-91 prices was hiked to SAR1.37/L (up 83% from SAR0.75 earlier) and Octane-95 prices was hiked to SAR2.04/L (up 127% from SAR0.90 earlier). The prices are inclusive of VAT, which again is effective from Jan 1, 2018. However, the Diesel and Kerosene prices were not hiked, which mainly have applications in industrial usage and commercial transportation. Though this could weaken consumption, this was expected and should reaffirm Govt s resolve to on driving the growth of non-oil economy. Kingdom announced the 2018 budget which stated that it will slow the pace of austerity measures and increase government spending. The government plans to spend SAR 978bn in 2018 compared to SAR 890bn planned for (SAR 926bn is the actual spending in ). Further, Kingdom pushed the target for balanced budget from 2020 to 2023. Kingdom s real GDP (preliminary) figures showed that the economy contracted 0.74% y-o-y (+1.67% y-o-y in ), primarily due to a 2.97% decline in oil sector because of production cut in compliance with OPEC agreement. On the other hand, the non-oil sector growth accelerated to 1.01% y-o-y, compared to 0.23% y-o-y growth in. (Figure 2 & 3). Within the non-oil sector, private sector (70% of real non-oil GDP) grew by 0.7% while Govt. sector (which composed rest 30% of the non-oil GDP) grew 1.7%. 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.
Saudi Arabia s Current Account Balance registered a surplus in to stand at USD 10.0bn (SAR37.5bn) after registering a deficit in the previous quarter. SAMA total reserves grew on a sequential basis in November, for the second consecutive month (Figure 9 & 10). Meanwhile, the deposits slipped 1.5% y-o-y (-0.1% m-om), whereas credit to the private sector dropped 0.8% y-o-y in November (-0.3% m-o-m) (Figure 11 & 12). Government reserves with SAMA stood at SAR629.2bn (including Government current account), as of November recording a 4.0% monthly drop. We expect it to continue to decline to csar596bn. Kingdom raised SAR 4.78bn via domestic sukuk sale. The government raised SAR 2.4bn of 5 year bonds, SAR 1.8bn of 7 year bonds and SAR 575mn of 10 year bonds. The issue received SAR 10.325bn orders. Point-of-sale (POS) transaction grew 10.1% y-o-y in November, versus the rise of 15.0% y-o-y in October, owing to the low base since October last year caused by the cut in public sector employee salaries and allowances. However, the ATM transactions dropped 2.3% y-o-y in November as against +1.3% y-o-y in October (Figure 6, 7 & 8) Banking sector profits climbed 13.7% y-o-y in November to SAR3.7bn. The sector s cumulative profits totalled to SAR41.1bn by November, a rise of 4.5% y-o-y (Figure 16). Crude oil prices (Brent February futures contract) jumped 7.0% MTD in December, owing to supply disruptions in Libya and the North Sea coupled with higher demand from China (Figure 19 & 20). Kingdom s non-oil exports rose by 13.1% y-o-y in October, compared to the fall of 2.1% y-o-y in September, while the non-oil imports increased 2.3% y-o-y in October, after dropping for two consecutive months (Figure 21, 22, 23, 24 & 25). Cost of living index entered the positive territory for the first time in almost a year in November at +0.1% y-o-y. The rise can be attributed to the lower drop in Food & Beverage, Furnishings, Household Equipment & Maintenance and Transport sectors. On a sequential basis the index edged up after a brief fall in the previous month (Figure 17 & 18). Crude price outlook: The US Energy Information Administration (EIA) in its December report estimated Brent crude oil prices to average around US$54/barrel in and US$57/barrel in 2018. Figure 1 Key macro indicators Variable Dec-17 Nov-17 Oct-17 Inflation Rate (2007=100) - 0.1% -0.2% 3.5% 2.2% Dec-17 Nov-17 Oct-17 Average Oil Price (Arab Light) (US$/Barrel) 62.6 61.1 55.7 41 49.9 Dec-17 Nov-17 Oct-17 Money Supply (M3) - -1.4% -0.6% 0.8% 2.5% Total Banking Sector Claims - 3.8 2.9 9.1 10.5 Interbank Interest Rate (3 Month) 1.899 1.808 1.792 2.066 0.88 Repo Rate 2.00 2.00 2.00 2.00 2.00 Reverse Repo Rate 1.5 1.25 1.25 0.75 0.5 General Share Price Index (1985=1000) - 0.1 15.3 4.3-17.1 * * * GDP Rate at Constant Prices (2010=100) - -1.0% -0.5% -0.7% 1.7% * * Current Account to GDP Ratio (current prices) - -1.7% 4.0% -3.7% -8.7% Total Imports (fob) to GDP Ratio (current prices) - 18.7% 17.9% 19.8% 24.3% Non-oil Exports to GDP Ratio (current prices) - 7.2% 7.0% 7.3% 7.7% Source: SAMA, Bloomberg * Provisional. Arab light and Interbank interest rate data is as on 26 December. Disclosures Please refer to the important disclosures at the back of this report. 2
GDP declined by 0.74% y-o-y in Gross Domestic Product Kingdom s GDP (preliminary) dropped 0.74% y-o-y (+1.67% y-o-y in ), where the oil sector fell 2.97% y-o-y (+3.6% y-o-y in ) whereas the non-oil sector rose 1.01% y-o-y (+0.23% y-o-y in ). The oil sector decline was related to the OPEC agreement to restrict oil production. The manufacturing sector, which accounts for ~12% the GDP, grew by 1.30% y-o-y in, down from 3.20% in ; while the finance, insurance, real estate & business services sector (constituting ~9% of the GDP) rose by 2.20% in from 2.73% in the previous year. Figure 2 Real GDP trend at constant prices (y-o-y) 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% 2012 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% Oil Sector Non-Oil Sector GDP (RHS) Figure 3 GDP Trend (y-o-y growth) Real GDP by type of economic activity Share in GDP 2012 Agri., Forest & Fish 2.35% 2.81% 3.28% 2.49% 0.61% 0.63% 0.36% Mining 39.37% 5.14% -1.48% 1.01% 4.70% 2.78% -3.40% Manu. 12.15% 4.07% 3.37% 9.54% 6.59% 3.20% 1.30% Elec., Gas & Water 1.33% 5.89% 1.63% 4.85% 5.26% 2.31% 1.26% Constr. 4.56% 4.77% 7.77% 6.75% 4.14% -3.18% -3.41% WS. & Retail Trade, Rest. & hotel 8.93% 6.03% 6.55% 5.98% 2.81% -1.58% 0.60% Trans., Storage & Comm. 5.89% 4.94% 6.42% 6.21% 5.80% 2.73% 1.94% Fin., Insur., Real Est. & Busi. 9.43% 7.55% 9.20% 3.31% 2.32% 2.73% 2.20% Community, Social & Personal 1.96% 5.94% 6.46% 5.66% 1.89% 1.71% 1.25% Prod. of Govt. 14.03% 5.34% 4.92% 3.30% 2.27% 0.16% 1.67% Gross Domestic Product 100% 5.41% 2.67% 3.68% 4.11% 1.67% -0.74% Current account recorded a surplus in Balance of Payments As per the data released by SAMA, the current account balance rose to stand at US$10.0bn, after a deficit in the previous quarter. Current account surplus in was supported by the rise in exports and lower imports. Exports have witnessed a steady rise for the past few quarters. Meanwhile, the total remittance fell to US$8.0bn, recording its lowest value since. Disclosures Please refer to the important disclosures at the back of this report. 3
Figure 4 Current Account Balance 50 USD bn 40 30 20 10 0-10 -20-30 Current Account Balance Figure 5 Breakdown of Current Account Balance USD bn 120 100 80 60 40 20 0-20 -40 Remittances Income Exports Imports Current Account Balance POS transactions continued its healthy growth in November Consumer spending indicators POS transactions climbed 10.1% y-o-y in November, compared to a 15.0% y-o-y rise in October. However, ATM cash slipped 2.3% y-o-y in November, as against the annual rise of 1.3% y-o-y in October. Spending growth was registered across most segments, primarily in Restaurants and Hotels (+17.0% y-o-y), followed by Food and Beverage sector (+12.1% y-o-y) and Transportation sector (+3.4% y-o-y). Figure 6 Point-of-sale transactions (POS) trend Figure 7 ATM cash withdrawals trend SAR bn 20.0 40% SAR bn 80.0 50% 18.0 16.0 14.0 12.0 10.0 30% 20% 10% 70.0 60.0 50.0 40.0 40% 30% 20% 10% 8.0 6.0 0% 30.0 20.0 0% -10% 4.0 2.0 - -10% -20% 10.0 - -20% -30% POS YoY ATM Cash withdrawals YoY Disclosures Please refer to the important disclosures at the back of this report. 4
Figure 8 Points-of-sale transactions trend by sectors 40.00% YoY change 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% -30.00% Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Transportation Rest. and Hotels Food & Beverages Cloth. and Footwear SAMA reserves rose on a monthly basis for the 2 nd consecutive month in November SAMA Foreign Exchange Reserves SAMA Foreign Exchange reserves dropped, although at a slower pace of 8.1% y-o-y in November as against the fall of 9.2% y-o-y in October. On a monthly basis, reserves rose by 0.2% in November, to stand at SAR 1,854bn (US$ 494.3bn). The reserves have witnessed a monthly rise in recent months as the domestic and international debt issues have reduced the government s need to use reserves to cover the fiscal deficit. Figure 9 Reserves assets Figure 10 Major components of foreign assets SAR bn 3,000 2,500 2,000 1,500 1,000 500 0 2 15.0% 5.0% -5.0% - -15.0% -2 SAR bn 2,500 2,000 1,500 1,000 500 0 Reserves Assets YoY (RHS) Foreign Currency & Deposits Abroad Investment in Foreign Assets Disclosures Please refer to the important disclosures at the back of this report. 5
Deposits and private sector credit slipped in November Credit and deposit growth Banking sector credit to the private sector declined for the ninth consecutive month by 0.8% y-o-y (-0.3% m-o-m) in November, versus the fall of 1.5% y-o-y ( m-o-m) last month. Claims on the public sector (though relatively much smaller than credit to private sector) jumped 31.0% y-o-y (+2.3% m-o-m) in November, compared to a 28.6% y-o-y (+3.5% m-o-m) rise in the previous month. Meanwhile, deposits slipped for the second month in a row by 1.5% y-o-y in November (-0.1% m-o-m). Business and Individual deposits, which constitutes ~71% of the total deposit base, dropped 4.0% y-o-y (-1.0% m-om), while Government Entities deposits increased 3.2% y-o-y (+0.8% m-o-m). Figure 11 Credit and deposit growth Figure 12 Loans to Deposits YoY 2 15.0% 5.0% -5.0% - 86.0% 85.0% 84.0% 83.0% 82.0% 81.0% 8 79.0% 78.0% 77.0% 76.0% Deposits Credit Loan to Deposit Ratio M3 rose on a monthly basis in November Money supply The broader money supply (M3) dipped 1.4% y-o-y in November, to reach SAR 1,769bn, versus the yearly fall of 0.6% in October. The drop in M3 can be attributed to a fall in M2 on an annual basis for the second month in a row. On a sequential basis, the M3 edged up for the first time in five months in November. Figure 13 Money supply growth (y-o-y) 25.0% 2 15.0% 5.0% -5.0% - -15.0% Figure 14 Deposits break-up SAR bn 1,200 1,000 800 600 400 200 0 M1 M2 M3 Time and Saving Deposits Demand Deposits Disclosures Please refer to the important disclosures at the back of this report. 6
Banking sector profits continue marching north Banking Sector The banking sector profits advanced 13.7% y-o-y in November, as against rise of 21.6% y-o-y in October. The cumulative banking sector profits totaled SAR 41,083mn in, registering a rise of 4.5% y-o-y in November compared to +3.7% y-o-y in the previous month. Figure 15 Non-performing loans 1.6 1.5 1.4 1.3 1.2 1.1 1.0 Figure 16 Net Profit for Banks SAR mn 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - Nonperforming loans to total gross loans Inflation rate edged up in November Inflation dynamics Cost of living index registered a positive reading for the first time in 11 months in November, recording a rise of 0.1% y-o-y versus the drop of 0.2% in October ; as the Food & Beverage, Furnishings, Household Equipment & Maintenance and Transport sectors, which account ~41% of the index, fell at a slower pace. On a sequential basis, the cost of living index edged up 0.1%. It is expected that the inflation rates in the Kingdom will rise after the implementation of VAT and energy price hikes. Figure 17 Inflation trend (y-o-y) Figure 18 Inflation drivers (y-o-y) 5.0% 4.0% 3.0% 2.0% 1.0% -1.0% 14.0% 12.0% 8.0% 6.0% 4.0% 2.0% -2.0% -4.0% -6.0% General Index Food And Beverages Transport Furnishings, Household Housing, Water, Electricity, Gas Disclosures Please refer to the important disclosures at the back of this report. 7
Crude oil production dropped sequentially in November Crude oil dynamics Crude oil output in Saudi Arabia fell 0.4% m-o-m in November, to stand at 9.97 mbpd, after edging up 0.1% m-o-m in October. On an annual basis, the crude oil output dropped at a slower pace of 5.3% in November versus the fall of 5.4% in October. The crude oil prices (Brent February futures contract) climbed 7.0% MTD in December, owing to supply disruptions in Libya and the North Sea. Further, rising demand from China also supported the oil prices. Figure 19 Saudi crude oil production trend Figure 20 Crude oil prices trend 10.8 10.6 10.4 10.2 10.0 9.8 9.6 9.4 9.2 9.0 8.8 12.0% 8.0% 6.0% 4.0% 2.0% -2.0% -4.0% -6.0% -8.0% 70 65 60 55 50 45 40 35 30 25 20 Source: Bloomberg, Al Rajhi Capital Saudi Crude oil production YoY growth Source: Bloomberg, Al Rajhi Capital Brent WTI Arab Light Non-oil foreign trade Non-oil exports and imports rose on an annual basis in October Kingdom s non-oil exports rose by 13.1% y-o-y in October, after a brief drop in the previous month. Exports grew owing to the rise in plastics & rubbers (+27.7% y-o-y), which constituted 36.8% of the total exports, followed by ordinary metals (+20.7% y-o-y), which contributed 8.5% to the total exports. Further, non-oil imports grew 2.3% y-o-y in October, as against the annual fall of 9.8% in September. The rise can be attributed to the rise in imports of machinery & electrical (+10.5% y-o-y) and chemical products (+8.6% y-o-y) which together account for 37.0% of the total imports. Meanwhile, UAE remained the top non-oil export destination, while China was the top importing country in October. Figure 21 Non-Oil Exports Commodities (SAR mn) Aug-17 Sep-17 Oct-17 % y-o-y % m-o-m Plastics & Rubbers 6,289 5,576 6,584 27.7% 18.1% Chemical Products 4,923 2,816 4,502 0.4% 59.9% Ordinary Metals 1,468 1,251 1,517 20.7% 21.3% Transport Equipments 1,051 1,022 1,528-0.9% 49.5% Others 3,292 2,582 3,757 11.0% 45.5% Total 17,023 13,247 17,888 13.1% 35.0% Disclosures Please refer to the important disclosures at the back of this report. 8
Figure 22 Non-Oil Imports Commodities (SAR mn) Aug-17 Sep-17 Oct-17 % y-o-y % m-o-m Machinery & Electricals 9,453 7,901 11,360 10.5% 43.8% Transport Equipments 6,440 4,700 7,389 1.3% 57.2% Ordinary Metals 3,375 2,764 3,611-7.4% 30.6% Chemical Products 3,734 3,712 4,857 8.6% 30.8% Others 15,089 12,446 16,665-1.5% 33.9% Total 38,091 31,523 43,882 2.3% 39.2% Figure 23 Non-oil export trend (y-o-y) YoY 7 6 5 4 3 2 - -2-3 Figure 24 Non-oil import trend (y-o-y) YoY 6 5 4 3 2 - -2-3 -4 Non-oil Export Non-oil Import Figure 25 Impact of currencies on Weighted-average Saudi imports (m-o-m) * FX movement (USD/Unit) Source: Bloomberg, GASTAT, Al Rajhi Capital April May June July August September October EUR 2.3% 3.2% 1.6% 3.6% 0.6% -0.8% -1.4% YUAN -0.1% 1.0% 0.6% 0.9% 1.9% -0.6% 0.1% YEN -0.1% 0.7% -1.4% 1.9% 0.3% -2.3% -1.0% FX impact on weighted average imports Germany 0.1% 0.2% 0.1% 0.2% -0.1% China 0.1% 0.1% 0.1% 0.3% -0.1% Japan -0.1% 0.1% -0.1% * 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 October has been chosen and assumed constant for preceding period, as consistent data sets is not available for all the countries chosen for analysis. For October, the weights are China (14.7%), Germany (5.3%) and Japan (4.5%). Saudi International bond yields rose on a MTD basis Saudi international bond yields Saudi International bond yields with 5 year maturity rose by 9.9bps MTD in December to 2.993%, while bond yields with 10 and 30 year maturities grew by 2.5bps and 0.4bps, respectively to 3.464% and 4.492%. Disclosures Please refer to the important disclosures at the back of this report. 9
Figure 26 International Bond Yields 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 30 Yr 10 Yr 5 Yr Source: Bloomberg, Al Rajhi Capital Euro and the GBP fell, on a MTD basis, against the USD in December Exchange Rates On the forex front, Australian dollar, Japanese yen, Canadian dollar and the Chinese Yuan rose, on a MTD basis, against the US dollar. Meanwhile, the Euro and the British pound witnessed a drop against the USD. Figure 27 Monthly Change (%) against the US Dollar 2.5% 2.0% 1.5% 1.0% 0.5% -0.5% -1.0% -1.5% Australia Japan Canada China Europe UK 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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