Saudi Economic Chartbook

Saudi Economic Chartbook Hans-Peter Huber, PhD Chief Investment Officer Riyad Capital 6775 Takhassusi St. Olaya Riyadh 12331-3712 rccioof ice@riyadcapital.com *This report is Issued by Riyad Capital

Saudi Economy Rebounding Due to Oil Sector The Saudi economy rebounded in Q1 2018 based on our GDP tracker model (see figure below). This is due to the oil sector which positively contributed to growth. Meanwhile, various indicators of the Non-oil economy point towards a slowdown in the first quarter. Official foreign currency reserves at SAMA continued to stabilize above 1800bln SAR in Q1 2018, a process which had already started in Q4 2017 and which is the result of an improving current account balance and regular foreign funding by the Saudi government. Fiscal non-oil revenues in Q1 2018 jumped by 20bln SAR compared to Q1 2017 due to higher tax income resulting form the recent fiscal reform measures. The fiscal expenditure increase of 30bln SAR can be explained by a higher government payroll and higher social benefits (citizen account). Table of Contents: GDP Data.. 2 Monetary and Financial Indicators. 3 Fiscal Balance and Government Debt. 6 Private Spending and Foreign Trade... 7 Saudi Arabia continued to produce crude oil below 10mbd in Q1 2018. Exports of crude and refined products, however, picked up in the first quarter by 8% compared to previous year s average. Meanwhile, oil prices have reached 80USD for Brent quality. 3M SAIBOR rates are again above USD LIBOR rates by mid-may. In the course of the first quarter, SAIBOR rates had been temporarily outstripped by LIBOR rates causing SAMA to take adequate measures to counter this negative interest rate spread. TASI continued its rally until end of April when some profit taking by foreign investors kicked in who had poured an unprecedented amount of 11bln SAR into the Saudi market during the months before. Saudi Economy Rebounding in Q1 2018 Non-Oil Business Climate Indicators..... 8 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 Our GDP Tracker model indicates a rebound of the Saudi economy in Q1 2018 due to a positive oil sector contribution. Facts and Figures at a Glance.... 18 Real GDP growth Overall economy, quarterly, %yoy Real GDP growth Tracker Overall economy, monthly, %yoy, RC 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 For the first quarter of this year our GDP Tracker model indicates a recovery of the overall economy after negative growth rates throughout 2017. This is primarily due to a positive growth contribution GDP deflator Non-oil private sector % yoy CPI inflation % yoy from the oil sector where the impact of the OPEC output cut agreement on oil production is fading in 2018 while the Non-oil economy most probably witnessed a further growth slowdown in Q1 2018. 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. The narrow monetary aggregates (monetary base and M1) witnessed low single-digit growth rates on a yearly basis while the broad monetary aggregates M2 and M3 were broadly unchanged, primarily due Banks overall customer deposits, % yoy, l.h. sc. Banks overall customers deposits, % mom, r.h.sc. to no growth in overall customer deposits. Credit to the private sector still exhibited negative growth on a year-on-year basis by March 2018 but marginally increased in the first three months of the year. Page 3

Commercial Banks Key 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 Foreign Assets to Total Assets Ratio Excess Liquidity to Total Assets Ratio Gross foreign assets as % of total assets Net foreign assets as % of total assets Marginally higher loans to the private sector and most recently a small decline in customer deposits drove the private sector loan-deposit-ratio to 87.9% in March. Meanwhile, the government s local bond Excess liquidity as % of total assets (Excess liquidity = banks current and other deposits at SAMA + SAMA bills) issues during Q1 2018 were entirely absorbed by the banks which increased their sovereign debt holdings by 20bln SAR causing the government sector loan-deposit-ratio to rise close to 20%. 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 In March 2018 SAMA official foreign currency reserves jumped by 27bln SAR which was most likely due to a 6bln USD capital inflow as a result of the increase in the government s syndicated USD-loan. In the first quarter 2018 foreign reserves overall declined gradually by 11 bln SAR after an increase of 42bln SAR in Q4 2017. Overall, foreign currency reserve managed to stabilize above 1800bln SAR. 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 Outstanding local government debt, in bln SAR Outstanding foreign government debt, in bln SAR source: MoF In Q1 2018 fiscal revenues increased by 22bln SAR vs. Q1 2017, primarily due to significantly higher tax revenues (VAT, excise tax). Oil revenues were only marginally higher but don t include an Aramco dividend to be paid in Q2 2017. Expenditure picked up by 20bln, exclusively as a result of a higher payroll and social benefits (citizen account) while capital spending was marginally lower than Q1 2017. 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 Point-of-sales transactions as a proxy for private consumption recovered in March after a sharp drop in January due to the introduction of the VAT. ATM transactions also picked up in the course of Q1 2018. Non-oil exports jumped in March 2018 by 36% yoy which could be explained by petrochemical exports (65% of Non-oil exports) where higher oil prices translated into higher product prices. 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 Purchasing Manager Indices as a proxy for the business climate of the Non-oil economy continued their notable decline which started in January 2018. In April the Composite index reached a new 9-year low Emirates NBD PMI Output Prices 6-Months Moving Average source: Markit at 51.4. This slowdown may be explained by the introduction of the fiscal reform measures in January 2018. The most pronounced decline affected New Orders where the index dropped below 50 in April. 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 CPI inflation, sub-index Furnishings, household equipment & maintenance, % yoy CPI inflation, sub-index Transport, % yoy After a jump in January due to the introduction of the fiscal reform steps, CPI inflation declined again below 3% in Spring 2018. This may be explained by the subdued economic activity which hasn t generated any inflationary pressure so far. Food prices are 6% higher yoy due to the introduction of the 5% VAT while transportation prices have been affected by the gasoline price increase in January. 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 (Q1 2018) Total value of quarterly transactions, %yoy Number of quarterly transactions, %yoy Riyadh Region Makkah Region Eastern Region All Other Regions source: MOJ, RC source: MOJ, RC The sharp increase in real estate transaction activity in terms of volumes and number of transactions in Q4 2017 was followed by a corresponding drop in Q1 2018. It seems highly likely that this cyclical market pattern was mainly caused by the introduction of the VAT in January 2018. In fact, all sales of residential and commercial properties are subject to VAT at the standard rate of 5%. 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 After a period of consolidation in 2017 residential real estate prices gradually dropped in Q1 2018. Commercial property prices continued their downturn into 2018 which is primarily due to a protracted decline in commercial land prices. In Q1 2018 property prices of commercial centers saw a decline after a long period of stability, while shops&galleries continued their price recovery since Q2 2017. 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 1000 bd. Saudi Arabian crude oil export, in 1000 bd. source: JODI, Bloomberg Saudi Arabian total oil refinery output in 1000 bd. Saudi Arabian total oil refinery export, in 1000 bd. source: JODI OPEC Crude Output Oil Prices OPEC crude oil production, in 1000 bd Brent oil price WTI oil price source: JODI, Bloomberg During Q1 2018 Saudi Arabia continued to produce crude oil below 10mbd. Meanwhile, exports of crude and refined products picked up in Q1 2018 to overall 9.1 mbd vs. an average of 8.4 for the full year 2017. OPEC crude output dropped to 31.5 mbd in March 2018 after a peak of 33.6 mbd in 2016 prior to the output cut agreement. Brent oil prices reached 80USD in May, a level last seen in autumn 2014. 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 Higher oil prices and a stabilized balance-ofpayment continue to provide strong support to the USD/SAR peg. As a result, the 12M-FX-forward premium is trading at levels comparable to the period SAR Real (CPI-adjusted) trade-weighted exchange rate index SAR Nominal trade-weighted exchange rate index, JPMorgan of high oil prices 5 years ago. The real and nominal SAR- exchange rate indices appreciated due to the recent strength of the USD against major currencies after a period of extended weakness in 2017. 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 In February 2018 3M USD LIBOR exceeded the 3M SAIBOR rate which caused SAMA to suspend its term repo facility and unilaterally increase its key interest rates prior to the FED in March. Meanwhile Reverse repo rate SAMA 3-months SAIBOR (Saudi Interbank Offered Rate) SAMA official repo rate SAIBOR rates are again slightly above LIBOR rates. SAR-USD yield spreads at the longer-end of the curve also notably narrowed with 5-year Swap rates exhibiting a small 60 bp difference in May 2018. Page 14

Saudi Balance of Payments Current Account Balance Foreign Workers Remittances Current account balance, quarterly in bln SAR Foreign workers remittances, quarterly in bln SAR (remittances outflow as part of Current account balance) Financial Account Balance Contribution to Balance of Payments Financial account balance (excluding changes in foreign reserve assets), quarterly in bln SAR (+ capital inflows, - capital outflows) The balance of payment (net change in foreign reserve assets) witnessed a surplus in Q4 2017 for the first time in three years. This was the result of a positive current account and financial account balance Current account balance Errors & omissions Financial account balance Net change in foreign reserve assets with the unexplained part of the balance-ofpayment, the error and omissions, being reasonably contained. For Q1 2018 we may expect a slight deficit according to monthly SAMA data (see page 5). 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 (in bln SAR) Weekly Net Purchase by Ownersip (in bln SAR) Retail Corporates Government related entities (GRE) source: Tadawul TASI continued its rally into the second quarter, reaching 8000 in the month of April. This rally was accompanied by rising trading volumes. Daily average traded value achieved almost 5 bln SAR in April Mutual funds High Net Worth Individuals total (HNWI and IPI) Foreign investors total (incl. GCC) source: Tadawul after an average of 3.3bln throughout 2017. In late April and beginning of May, foreign investors, who had previously injected a net amount of about 11bln SAR in 2018 so far, started to take some profits. Page 16

Tadawul: Saudi Equity Market Statistics Performance TASI Sectors April 2018YTD 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 By the end of April TASI showed a positive performance of 15.4% (including dividends) since the beginning of 2017. Q1 earnings for TASI picked up by 34% vs. Q4 2017 but were 7% below the same period last year. As a result of the recent strong rally, TASI experienced a PE-multiple expansion at a trailing and forward earnings basis bringing the market valuation gradually above its long-term average. Page 17

Economic Facts and Figures at a Glance GDP and Fiscal Indicators 2013 2014 2015 2016 2017 2018f Real GDP Growth Overall economy 2.7 3.7 4.1 1.7-0.7 1.7 Non-oil Private sector 7.0 5.4 3.4 0.1 0.7 1.8 Government sector 5.1 3.7 2.7 0.6 1.7 2.0 Oil sector -1.6 2.1 5.3 3.6-3.0 1.5 Fiscal Balance and Government Debt Fiscal Balance in bln SAR 180-71 -362-311 -238-165 Fiscal Balance in % GDP 6.4-2.5-14.8-12.9-9.3-6.0 Government debt in bln SAR 60 44 142 317 443 558 Government debt as % GDP 2.1 1.6 5.8 13.1 17.3 20.1, MOF, RC Oil, Inflation and Interest Rates 2013 2014 2015 2016 2017 2018f Oil Prices and Production (yearly average) Brent price (USD pb) 108.7 99.5 53.7 44.1 54.8 67.0 WTI price (USD pb) 98.0 92.9 48.8 43.3 50.9 63.0 OPEC Basket price (USD pb) 105.9 96.2 49.5 40.7 52.4 65.0 KSA oil production (mln bd) 9.6 9.7 10.2 10.5 9.9 10.0 Inflation and Interest Rates (year end) CPI Inflation (yearly average) 3.51 2.24 1.22 2.05-0.84 3.10 3M SIBOR SAR 0.96 0.86 1.55 2.04 1.90 2.65 Reverse Repo Rate 0.25 0.25 0.50 0.75 1.50 2.50 Official Repo Rate 2.00 2.00 2.00 2.00 2.00 2.75, SAMA, RC External Balance 2013 2014 2015 2016 2017 2018f Trade and Current Account Trade Balance in bln SAR 835 690 166 209 382 546 Trade Balance in % GDP 29.8 24.3 6.8 8.6 14.9 19.7 Current Account in bln SAR 508 277-213 -90 57 216 Current Account in % GDP 18.1 9.8-8.7-3.7 2.2 7.8, RC Tadawul Equity Market Key Figures (period end) 2013 2014 2015 2016 2017 04/18 Total Return in % 30.2 0.7-14.6 8.2 3.7 15.4 P/E-ratio 16.4 18.2 15.9 17.2 17.0 15.2 P/B-ratio 2.0 2.1 1.6 1.7 1.6 1.8 RoE 12.2 11.5 10.2 9.7 9.5 11.6 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 2017 2018f World 3.3 3.4 3.2 3.2 3.8 3.9 Advanced Economies 1.2 1.8 2.1 1.7 2.3 2.5 USA 1.5 2.4 2.6 1.5 2.3 2.9 Euro Area -0.4 0.8 2.0 1.8 2.3 2.4 Japan 1.6 0.3 1.1 0.9 1.7 1.2 United Kingdom 1.7 2.9 2.2 1.9 1.8 1.6 Emerging Market Economies 5.0 4.7 4.3 4.4 4.8 4.9 China 7.7 7.3 6.9 6.7 6.9 6.6 India 6.9 7.2 8.0 7.1 6.7 7.4 Russia 1.3 0.7-2.8-0.2 1.5 1.7 Brazil 2.7 0.1-3.5-3.5 1.0 2.3 We expect Saudi economic growth to recover in 2018 by +1.7% after a contraction of -0.7 in 2017. This rebound is the result of a positive contribution by the oil sector, where the output cut 2017 is fading, and a continued recovery of the Non-oil economy fuelled by an expansionary budget in 2018. Due to higher than expected oil revenues the budget deficit will shrink distinctly below its budgeted target of 195 bln SAR. Based on the latest outlook of the IMF, global economic growth is expected to accelerate to 3.9% in 2018 after 3.8% in 2017. This growth acceleration is expected to be broad based, but primarily driven by emerging economies. source: IMF Page 18

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