Saudi Economic Chartbook Hans-Peter Huber, PhD Chief Investment Officer Riyad Capital 6775 Takhassusi St. Olaya Riyadh 12331-3712 rcciooffice@riyadcapital.com
Subdued Economic Activity but Fiscal Consolidation on Track The Saudi economy witnessed negative GDP growth in the first two quarters of 2017, a trend which is expected to continue into Q3 2017 according to our GDP Tracker model. This is due to a distinct contraction of the oil sector and a tepid recovery of the Non-oil economy. Indicators of the domestic Non-oil economy still deliver a mixed picture in Q3 2017. Private spending and business climate indicators point towards subdued economic activity while non-oil exports and imports provide tentative signs of a rebound. The latest quarterly fiscal budget figures show that the fiscal deficit has notably narrowed after 9 months compared to last year. This is due to considerably higher revenues while overall fiscal spending broadly corresponds to last year s figure after 9 months. Table of Contents: GDP Data.. 2 Monetary and Financial Indicators. 4 Fiscal Balance and Government Debt. 6 Private Spending and Foreign Trade... 7 Non-Oil Business Climate Indicators..... 8 The real estate market shows some signs of stabilization in the 3rd quarter 2017. The protracted decline in transaction volumes over the last two years has almost come to a halt. Accordingly, real estate prices have generally started to consolidate. There is still a remarkably high level of compliance to the OPEC output cut agreement with Saudi Arabia in particular cutting its output beyond target. This, combined with strong global demand, explains the strength of oil prices in the second half 2017. The Saudi equity market continues to trade in a very narrow range so far this year. After the recent weakness since October and the distinct earnings recovery throughout 2017 valuations have dropped again towards their long-term average. Continued Negative GDP Growth Expected into H2 2017 Inflation Indicators... 9 Real Estate Market... 10 Oil Market. 12 Foreign Exchange and Interest Rates.... 13 Saudi Balance of Payments...15 Saudi Equity Market... 16 Facts and Figures at a Glance.... 18 Real GDP growth Overall economy, quarterly % yoy Tracker Model of real GDP growth Overall economy, monthly, %yoy The GDP Tracker is based on an econometric model using the latest monthly economic indicators to estimate coincident GDP growth rates. For the 3rd quarter it predicts continued negative growth for the overall economy. Page 1
Gross Domestic Product (GDP) Overall Economy and Institutional Sectors Real GDP Overall Economy and Oil Sector Nominal and Real GDP Non-Oil Private Sector Real GDP growth Overall economy, quarterly % yoy Real GDP growth Oil-sector, quarterly % yoy Real GDP growth Non-oil private sector, quarterly % yoy Nominal GDP growth Non-oil private sector, quarterly % yoy Monthly GDP Tracker of Overall Economy GDP Deflator and CPI Inflation Real GDP growth Overall economy, quarterly, %yoy Real GDP growth Tracker Overall economy, monthly, %yoy, RC According to our monthly GDP Tracker model which estimates coincident GDP growth rates based on the latest monthly economic indicators real growth of the Saudi economy will continue to be in negative GDP deflator Non-oil private sector % yoy CPI inflation % yoy territory in the 3rd quarter 2017. This is primarily due to the oil sector which will exhibit a distinct contraction in Q3 as a result of Saudi Arabia s strong compliance to the OPEC output cut agreement. Page 2
Monetary Aggregates, Credit and Commercial Banks Deposits Growth Rate Monetary Base and Aggregate M1 Growth Rate Monetary Aggregates M2 and M3 Monetary base, % yoy Aggregate M1, % yoy Aggregate M3, % yoy Aggregate M2, % yoy Growth of Credit to the Private Sector Growth of Commercial Banks Deposits Banks claims on private sector, % yoy, l.h.sc. Banks claims on private sector, % mom, r.h.sc. Banks overall customer deposits, % yoy, l.h. sc. Banks overall customers deposits, % mom, r.h.sc. In the 3rd quarter 2017 growth rates of the broader monetary aggregates M2 and M3 started to drop as a result of a reduction in customer deposits at commercial banks. Unlike in the second quarter no further government institutions deposits were shifted to commercial banks during Q3. Meanwhile, growth of credit to the private sector continued to be negative in Q3 but stabilized around -2.5% yoy. Page 3
Commercial Banks Loan-Deposit-Ratios Private Sector Loan-Deposit-Ratio Government Sector Loan-Deposit-Ratio Claims on the private sector as % of total bank deposits Claims on the government as % of total bank deposits Loan-Deposit-Ratios in the Long Term Overall Loan-Deposit-Ratio in the Long Term Claims on the private sector as % of total bank deposits Claims on the government as % of total bank deposits As a result of dropping customer deposits at commercial banks the private sector loan-deposit-ratio (LDR) has increased in Q3 from 86.8 to 88.5 but is still clearly below its peak in Q3 2016. Meanwhile, Claims on private sector and government as % of total bank deposits the government sector LDR has jumped from 15.1 to 17.4 in Q3 as the government has resumed its local bond issuance program and commercial banks increased their bond holdings by 32bln SAR. Page 4
SAMA Balance Sheet: Key Elements of Assets and Liabilities Foreign Currency Reserves at SAMA Government Deposits at SAMA Total foreign currency reserves at SAMA, in bln SAR, l.h.sc. Monthly change in foreign currency reserves at SAMA, in bln SAR, r.h.sc. Foreign Currency Reserves at SAMA - the long Term Total government deposits at SAMA, in bln SAR, l.h.sc. Monthly change in total government deposits at SAMA, in bln SAR, r.h.sc. Government Deposits at SAMA the long Term Total foreign currency reserves at SAMA, in bln SAR Total government deposits at SAMA, in bln SAR Saudi official foreign currency reserves dropped by 58bln SAR in Q3 after a decline of 30bln in Q2. By end of Q3 2017 they amount to 1820bln SAR which is 35% below their peak in August 2014. Government deposits at SAMA declined by 26bln SAR in Q3 after 17bln SAR in Q2. At the end of Q3 2017 they amount to 613bln SAR which implies a reduction of 60% compared to their peak in October 2013. Page 5
Quarterly Fiscal Balance and Outstanding Government Debt Quarterly Fiscal Revenues (in bln SAR) Quarterl Fiscal Expenditure (in bln SAR) Oil revenues Non-oil revenues source: MoF Employee compensation (salaries & wages) Other current expenditure Capital expenditure source: MoF Quarterly Fiscal Deficit/Surplus (in bln SAR) Outstanding Government Debt (End of Quarter) Net deficit/surplus* source: MoF The latest quarterly fiscal budget figures show that the accumulated deficit after 9 months is about 40% smaller than last year s figure (-121bln vs. -203bln SAR). This is due to notably higher revenues after 9 Outstanding local government debt, in bln SAR Outstanding foreign government debt, in bln SAR source: MoF months (450bln vs. 366bln SAR) while fiscal expenditure broadly corresponds to last year (572bln vs. 569bln SAR). Outstanding debt has increased by 59bln SAR so far this year to 376bln SAR. Page 6
Private Spending Indicators and Non-Oil Foreign Trade Point-of-Sales Transactions ATM Transactions Point-of-sales transactions, % yoy 3-Months Moving Average, % yoy ATM withdrawals, % yoy 3-Months Moving Average, % yoy Growth of Non-Oil Exports Growth of Imports Non-Oil exports, % yoy 3-Months Moving Average, % yoy Imports, % yoy 3-Months Moving Average, % yoy Indicators of private spending continue to show a mixed picture in Q3 2017. PoS-transactions growth dropped back below 10% in September while ATMwithdrawals witnessed a particularly sharp decline by -13.4% yoy in the same month. On the other side, foreign trade figures offer a more constructive view on the economy with both non-oil export and import growth turning clearly positive during Q3 2017. Page 7
Non-Oil Private Sector Business Climate Indicators Purchasing Manager Index Composite Purchasing Manager Index Output Emirates NBD PMI Composite 6-Months Moving Average source: Markit Emirates NBD PMI Output 6-Months Moving Average source: Markit Purchasing Manager Index New Orders Purchasing Manager Index Output Prices Emirates NBD PMI New Orders 6-Months Moving Average source: Markit The Saudi Purchasing Manager Indices continue to be volatile on a month-to-month basis, but the medium-term trend (6-months moving average) indicates a gradual deterioration of the business climate Emirates NBD PMI Output Prices 6-Months Moving Average source: Markit for the non-oil economy in Q3 2017 after a period of recovery which started in the 4th quarter 2016. This applies to the composite index as well as its major components such as output and new orders. Page 8
Consumer and Wholesale Price Inflation Consumer Price Inflation All Items Consumer Price and Wholesale Price Inflation CPI inflation, % yoy CPI inflation, % yoy WPI inflation, % yoy CPI Inflation Food & Housing CPI Inflation Furnishings & Transportation CPI inflation, sub-index Food and beverages, % yoy CPI inflation, sub-index Housing, water, electricity, gas and other fuels, % yoy The deflationary trend of the Saudi CPI-inflation continues to diminish into Q4 2017 with -0.1% yoy in September after -0.7% back in May. This can in part be explained by a fading deflation of the CPI inflation, sub-index Furnishings, household equipment & maintenance, % yoy CPI inflation, sub-index Transport, % yoy food&beverages sub-index which exhibits a weight of 22% in the overall index. The excise taxes on soft drinks next to those on tobacco imposed in June have helped to ease this deflationary pressure. Page 9
Real Estate Market: Transaction Activity Quarterly Real Estate Transactions Overall Country Quarterly Residential Real Estate Transactions Total value of quarterly transactions, %yoy Number of quarterly transactions, %yoy source: MOJ, RC Total value of quarterly transactions, %yoy Number of quarterly transactions, %yoy source: MOJ, RC Quarterly Commercial Real Estate Transactions Breakdown of Transaction Value by Regions (Q3-2017) Total value of quarterly transactions, %yoy Number of quarterly transactions, %yoy Riyadh Region Makkah Region Eastern Region All Other Regions source: MOJ, RC In Q3 2017 the Saudi real estate market shows signs of stabilization after a protracted period of decline which started by end of 2014. The yearly decline of transaction volumes and number of transactions has source: MOJ, RC almost come to a halt. This applies to the overall market but in particular also to the commercial real estate area. It remains to be seen whether this trend will be confirmed in the coming quarters. Page 10
Real Estate Market: Price Indices Residential and Commercial Price Indices Residential and Commercial Land Price Indices Residential price index Commercial price index Residential land price index Commercial land price index Residential Villas and Apartments Price Indices Commercial Shops and Centers Price Indices Residential villas price index Residential apartments price index Commercial centers price index Commercial shops & galleries price index Similar to the transaction volumes real estate prices have also started to stabilize. Only commercial land prices continued to gradually decline in Q3 2017. The residential area, on the other hand, exhibits rising land prices for the second consecutive quarter. A general price stabilization can also be observed for residential (villas and apartments) and commercial (centers, shops&galleries) structures. Page 11
Oil Market Statistics: Production, Exports, Refinery and Prices Saudi Crude Oil Production and Exports Saudi Crude Refinery Output and Exports Saudi Arabian crude oil production, in tsd bd Saudi Arabian crude oil export, in tsd bd source: JODI, Bloomberg Saudi Arabian total oil refinery output in tsd bd Saudi Arabian total oil refinery export, in tsd bd source: JODI Compliance to Output Cut Agreement Oil Prices OPEC member contribution to achieve output cut target Non-OPEC member contribution to achieve output cut target (100% = output cut target of -1.72mln bd achieved) Brent oil price WTI oil price In September the Saudi crude production was at 9.97mln bd, and, hence, below the output target of 10.06mln bd. Overall, compliance to the output cut agreement of OPEC and affiliated Non-OPEC producers is still high with actual cuts even 4% deeper than the target level in September. The recent oil price rally is primarily due to this high OPEC discipline, combined with stronger global growth in 2017. Page 12
Foreign Exchange: Forward Rates and Effective Exchange Rate Index 12-Months Forward Exchange Rate SAR/USD SAR Nominal and Real Effective Exchange Rate 12-months forward exchange rate USD/SAR 12-Months Forward Exchange Rate SAR/USD in the Long Term SAR Real (CPI-adjusted) trade-weighted exchange rate index SAR Nominal trade-weighted exchange rate index, JP Morgan SAR Nominal and Real Effective Exchange Rate in the Long Term 12-months forward exchange rate USD/SAR The SAR FX-forward premium has gradually picked up by beginning of November due to recent geopolitical events in KSA and the region but stays still clearly below the peak in January 2016 which was SAR Real (CPI-adjusted) trade-weighted exchange rate index SAR Nominal trade-weighted exchange rate index, JPMorgan triggered by oil prices falling below 30USD. The recent USD rebound has also led to a recovery of the trade-weighted SAR-index after a period of sustained weakness since the beginning of this year. Page 13
Interest Rates: Money Market, Capital Market and Central Bank Rates 3-Months SAIBOR vs. USD LIBOR 5-Year Swap Rate SAR vs. USD 3-months SIBOR SAIBOR (Saudi Interbank Offered Rate) 3-months US LIBOR (London Interbank Offered Rate) 5-year Swap rate SAR 5-year Swap rate USD KSA USD-Bonds Yield Spread to US Treasuries Central Bank Rate and 3-Months SAIBOR 30-year maturity 5-year maturity 10-year maturity Reverse repo rate SAMA 3-months SAIBOR (Saudi Interbank Offered Rate) 3M SAIBOR rate has establish around 1.80% since the end of Q2 2017. As the 3M USD LIBOR rate has climbed by about 10bp to 1.40% during the 3rd quarter, the SAIBOR-LIBOR spread has accordingly diminished to about 40bp. The same spread tightening can be observed for 5-year swap rates where the SAR-USD rate differential has declined to 95bp after having been at 130bp back in June of this year. Page 14
Saudi Balance of Payments Current Account Balance Financial Account Balance Current account balance, quarterly in bln SAR Financial account balance (excluding changes in foreign reserve assets), quarterly in bln SAR (+ capital inflows, - capital outflows) Contribution to Balance of Payments Net Change in Foreign Reserve Assets Current account balance Financial account balance Net change in foreign reserve assets, quarterly in bln SAR Errors & omissions Net change in foreign reserve assets In Q2 2017 the current account as well as the financial account balance showed a surplus which summed up to a combined 22bln SAR. Yet, due to errors and omissions which were estimated at a negative 56bln SAR in Q2 the foreign reserve assets at SAMA declined by 34bln SAR. From a mediumterm perspective the depletion of foreign reserves has overall clearly diminished over the last 2 years. Page 15
Tadawul: Saudi Equity Market Statistics Tadawul All-Share Index Tadawul Total Trading Value Tadawul All-share index 10-Weeks Moving Average Average daily trading value for Tadawul, in mln SAR source: Tadawul Weekly Net Purchase by Ownersip Weekly Net Purchase by Ownersip Retail Corporates Government related entities (GRE) source: Tadawul TASI continues to trade in a narrow range of 6800-7500 so far in 2017. Most recently the market witnessed some weakness and was again supported by (government related) private funds purchases. Mutual funds High Net Worth Individuals total (HNWI and IPI) Foreign investors total (incl. GCC) source: Tadawul Meanwhile, trading volume remains subdued as a result of the range-bound market, the low volatility and little IPO activity throughout 2017. The average daily traded value stabilizes around 3bln SAR. Page 16
Tadawul: Saudi Equity Market Statistics Performance TASI Sectors October 2017YTD Quarterly Earnings TASI Performance in % YTD, including dividends TASI quarterly EPS in SAR, l.h.sc TASI 4Q trailing EPS in SAR, r.h.sc. Valuation TASI: PE-Ratio Trailing Valuation TASI: PE-Ratio Forward PE ratio TASI, 12-months trailing earnings Long-term average PE ratio TASI, 12-months forward earnings Long-term average On a total return basis (i.e. including dividends) TASI exhibits an almost flat performance 2017YTD by end of October (-0.7%). Corporate earnings have picked up in Q3 2017 which has also gradually compressed the trailing PE-ratio to a level which corresponds to the long-term average. The same also applies to the forward PE-ratio where the current level coincides with the long-term mean value. Page 17
Economic Facts and Figures at a Glance GDP and Fiscal Indicators 2013 2014 2015 2016 2017f 2018f Real GDP Growth Overall economy 2.7 3.7 4.1 1.4-0.8 0.9 Non-oil Private sector 7.0 5.4 3.4 0.1 1.2 1.0 Government sector 5.1 3.7 2.7 0.5 0.8 0.5 Oil sector -1.6 2.1 5.3 3.4-3.2 1.0 Fiscal Balance and Government Debt Fiscal Balance in bln SAR 180-71 -362-311 -180-150 Fiscal Balance in % GDP 6.4-2.5-15.0-13.0-7.1-5.7 Government debt in bln SAR 60 44 142 317 432 546 Government debt as % GDP 2.1 1.6 5.8 13.2 17.0 20.8, MOF, RC Oil, Inflation and Interest Rates 2013 2014 2015 2016 2017f 2018f Oil Prices and Production (yearly average) Brent price (USD pb) 108.7 99.5 53.7 44.1 54.0 55.0 WTI price (USD pb) 98.0 92.9 48.8 43.3 50.0 52.0 OPEC Basket price (USD pb) 105.9 96.2 49.5 40.7 52.0 53.0 KSA oil production (mln bd) 9.6 9.7 10.2 10.5 10.0 10.1 Inflation and Interest Rates (year end) CPI Inflation (yearly average) 3.52 2.68 2.18 3.50-0.10 3.50 3M SIBOR SAR 0.96 0.86 1.55 2.04 2.10 2.75 Reverse Repo Rate 0.25 0.25 0.50 0.75 1.50 2.00 Official Repo Rate 2.00 2.00 2.00 2.00 2.00 2.50, SAMA, RC External Balance 2013 2014 2015 2016 2017f 2018f Trade and Current Account Trade Balance in bln SAR 835 690 166 209 356 385 Trade Balance in % GDP 29.8 24.3 6.8 8.7 14.0 14.7 Current Account in bln SAR 508 277-213 -103 61 97 Current Account in % GDP 18.1 9.8-8.7-4.3 2.4 3.7, RC Tadawul Equity Market Key Figures (period end) 2012 2013 2014 2015 2016 10/17 Total Return in % 9.3 30.2 0.7-14.6 8.2-0.7 P/E-ratio 14.4 16.4 18.2 15.9 17.2 14.4 P/B-ratio 1.8 2.0 2.1 1.6 1.7 1.5 RoE 12.3 12.2 11.5 10.2 9.7 10.7 P/E-ratio = Price/ Earnings-ratio, P/B-ratio = Price / Book-ratio all ratios on trailing basis except 2017 forecast (consensus forward-ratios) Global Economy GDP Growth Rates 2013 2014 2015 2016 2017f 2018f World 3.3 3.4 3.2 3.2 3.6 3.7 Advanced Economies 1.2 1.8 2.1 1.7 2.2 2.0 USA 1.5 2.4 2.6 1.6 2.2 2.3 Euro Area -0.4 0.8 2.0 1.8 2.1 1.9 Japan 1.6 0.3 1.1 1.0 1.5 0.7 United Kingdom 1.7 2.9 2.2 1.8 1.7 1.5 Emerging Market Economies 5.0 4.7 4.3 4.3 4.6 4.9 China 7.7 7.3 6.9 6.7 6.8 6.5 India 6.9 7.2 8.0 7.1 6.7 7.4 Russia 1.3 0.7-2.8-0.2 1.8 1.6 Brazil 2.7 0.1-3.8-3.6 0.7 1.5 We expect Saudi economic growth to fall by -0.8% in 2017 from 1.4% in 2016. This slowdown is the result of output cuts in the oil sector throughout 2017. For 2018 we expect a gradual recovery of the oil sector (+1.0%) and, combined with a continued subdued recovery of the non-oil private sector, an overall GDP growth of +0.9%. The fiscal deficit is expected to shrink to 7.1% of GDP in 2017 and 5.7% in 2018. Based on the latest outlook of the IMF the global economy is forecasted to grow by 3.6% in 2017 and by 3.7% in 2018. This growth acceleration is expected to be broad based, driven by advanced as well as emerging economies. source: IMF Page 18
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