Saudi Arabian economy Oil production stabilizes around 9 mbpd

Md. Rahmatullah Khan, Economic analyst Tel: +966 1 211 9319, khanmr@alrajhi-capital.com Saudi Arabian economy Saudi Arabian economy Oil production stabilizes around 9 mbpd Crude production in Saudi Arabia has stabilized around 9 million barrel per day in the last two months after sharp decline in previous months. Global crude supply was slightly lower in January due slippage in production in even non-opec producers. This coupled with improving global economic outlook pushed crude prices slightly higher last month and this month as well. Non-oil exports from Saudi Arabia turned around in December after six consecutive declines. Total non-oil exports are estimated at SAR176bn in 2012, same as levels in 2011. Monetary and credit indicators moderated a bit in the first month of 2013. Money supply growth eased in January, and it was lower for the entire year of 2012 compared to 2011. Both credit growth and deposits growth eased down in January but credit growth continued to outpace deposits growth. Foreign reserve assets of SAMA increased SAR434bn in 2012 to reach SAR2463bn. It further moved up to SAR2484bn at the end of last month. Real economic indicators: Crude production in Saudi Arabia was stable around 9 million barrel per day in the last two months after sharp decline in previous months. We expect the production to be around the current levels in near term and move up as summer starts to push domestic demand higher. Crude prices (Brent crude price) have gained further in February after 3.4% gain in January due to slippage in global supply. Non-oil exports turned around in December after decline in six consecutive months. Preliminary estimates from CDSI put non-oil exports at SAR176bn in 2012, same as levels in 2011. However, import has grown 9.4% to SAR540bn during the same period. Monetary and credit indicators: Monetary and credit indicators moderated slightly in January. Measures of money supply grew at slower rate due to slowdown in deposits growth. M1, M2 and M3 growth slowed to 14.7%, 13.2% and 13.4% year-on-year respectively in January. Moreover, growth in money supply was slower in 2012 compared to 2011. Credit growth to private sector remained strong even as deposits growth slowed a bit. Credit grew 16.4% in 2012, outpacing deposits growth of 14.2%. Foreign reserve assets increased by SAR434bn in 2012 to reached at SAR2463bn. This is almost 9 of GDP and sufficient for more than four years of imports at the current rate of SAR540bn per year. Table 1. Macroeconomic Indicators for Saudi Arabia 2010 2011 2012E 2013F 2014F Real GDP ( growth) 4.7% 8. 6.8% 3.3% 4. Nominal GDP (SAR billion) 1975 2511 2727 2763 2995 Inflation (monthly average) 5.3% 4. 4.2% 4% Revenue (SAR billion) 735 1110 1239 1030 1123 Expenditure (SAR billion) 627 804 853 904 967 Fiscal Balance (SAR billion) 87 306 386 126 156 Trade balance (SAR billion) 541 883 1005 669 678 Current account (SAR billion) 250 594 669 329 328 Current account (% of GDP) 12.6% 23.6% 24. 11.9% 10.9% Disclosures Please refer to the important disclosures at the back of this report. 1

Real economic indicators Figure 1 Crude production stabilizes at around 9 mbpd 130 120 110 100 90 80 USD per barrel WTI Brent Source: OPEC, Al Rajhi Capital Figure 2 External trade turn around 50. 40. 30. 20. 10. 0. -10. -20. -30. mbpd Arab Lights KSA production-rhs 10.5 10.0 9.5 9.0 8.5 Domestic crude production and global price Crude production in Saudi Arabia seems to be stabilizing around 9 million barrel per day (mbpd). According to OPEC data, average production in January was 9.05 mbpd compared to 9.02 mbpd production in December. Note that the production peaked in the second quarter of 2012 when it had crossed 10 mbpd. Since then, the production moderated to 9.76 mbpd in the third quarter and 9.4 mbpd in the fourth quarter. We expect that Saudi crude production will stabilize around the current levels for another couple of months after that it will increase in the wake of rising summer demand in the country. In the wake of improving global economic outlook, oil prices have moved up in January. Brent crude price averaged around US$113 per barrel in January, up 3.4% from an average price in December. Surprisingly, gains in average WTI Nymex crude price was almost double at 7.4% during the period. On the other hand, gain in average Arab Lights crude price was moderate at 2.1%. Besides improving global economic outlook, reduction in production from OPEC countries helped crude prices move up. Supply from non-opec countries which had been rising for the last four quarters also dipped by 190 thousands barrel per day in January compared to production in December. However, International Energy Agency forecasts that the supply from non- OPEC will increase by 750 thousands barrel per day in Q1-2013 compared to a year ago. Moreover, the agency expects that the supply from non-opec countries will increase by 1 mbpd in 2013 compared to the average daily production in 2012. On the other hand, it expects global demand to grow by 850 thousands barrel per day this year. Non-oil foreign trade turned around at the turn of the year Non-oil export from Saudi Arabia turned around in December after successive declines in the previous six months. The preliminary data from the Central Department of Statistics and Information show that the non-oil export reached to SAR18.1bn in December, a rise of 7.9% from a year ago. Note that the non-oil export had started declining since June 2012 as global economic recovery faltered. However, turn around in the same has helped non-oil export to move up. Value of petrochemical exports was SAR6.3bn in December which constituted almost 3 of the total non-oil exports. Plastics was the second major non-oil export item, valued at SAR5.8bn, constituted 32% of total non-oil exports. The share of re-export items was 14. in the total non-oil exports. Non-oil export growth Total import growth As far as destination is concerned, Non-Arab Asian countries remained the main destination for Saudi non-oil exports as the region received 34% of the total non-oil exports. China remained the single largest destination as the country received 12.9% of the total non-oil export, and India was the fourth largest destination with 4.4% share. Neighbouring United Arab Emirates was the second largest destination with 12.6% share in the total non-oil exports. According to the same report from CDSI, the total non-oil exports was SAR176bn in 2012, almost same as in 2011. Strong gains in the first half of the 2012 was nullified by the decline in six consecutive months, June through November. Total import has been estimated at SAR540bn in 2012 compared to SARSAR493.7bn in 2011, an increase of 9.4%. Disclosures Please refer to the important disclosures at the back of this report. 2

Figure 3 Inflation inched up due to food inflation 10. 8. 6. 4. 2. 0. -2. Inflation We would like to highlight that we continue to track old series of inflation index (1999=100) for the purpose of having historical comparison. The series shows that consumer inflation has moved further up to 4.2% in January mainly due to jump in food and other components even as rent etc has come down. Food and beverage inflation accelerated to 6% in January from 5.1% in December. Moreover, other expenses and services also moved up to 3.2% in January from 0.9% in December. On the other hand, rent, renovation, fuel and water witnessed sharp moderation from 6.3% in December to 5.1% in January. This is the lowest reading in rent component since April 2007. Sharp rise in rents in 2011 and the first half of 2012 is leading to moderation in the same this year. Inflation Food inflation Other smaller components have also eased somewhat. Rate of price rise in Fabric, clothing and footwear has moderated to 2.6% in January from 3.1% in December. Inflation in transport and telecommunication and education and entertainment eased by a tenth of percentage point to 1.4% and 1.9% respectively. Inflation in medical care has remained stable at 0.3% for the last four months. Monetary and credit indicators Figure 4 Money supply moderated in January 3 3 2 1 Year-on-Year M1 M2 M3 Figure 5 Credit growth remains strong 1 Year-on-Year Loans, advaces and overdrafts growth Deposits growth Money supply Measures of money supply growth eased a bit in January after a jump in the previous month. M1 growth moderated to 14.7% YoY in January compared to 16.6% YoY in December. The moderation in M1 was mainly due to decline in demand deposits growth from 17.6% YoY in December to 15. YoY in January. M2 growth also decelerated slightly from 13.6% YoY to 13.2% YoY during the period on the back of M1 growth, even as time and savings deposits growth accelerated from 6.2% YoY to 9.1% YoY. M3 growth moved down from 13.9% YoY to 13.4% YoY during the same period. The moderation in money supply growth was mainly due to turn around in demand deposits even as time and savings deposits growth accelerated. On the monthly basis, demand deposits grew 1.1% in January compared to 6.9% in December. This resulted into slow down in M1 that grew 1.1% MoM in January compared to 5.9% MoM in December. On the monthly basis, time and savings deposits declined 0.3% in January, similar to the pattern in previous years. Finally, M3 grew 0. MoM in January compared to 4.8% MoM in the previous month. For the entire year 2012, M1 and M2 growth slowed down whereas M3 accelerated slightly compared to the year 2011. M1 grew 16.6% in 2012 compared to 21.6% in 2011 whereas M2 growth slowed to 13.6% from 15.4%. On the other hand, M3 growth moved up from 13.3% in 2011 to 13.9% in 2012. The broader slowdown in M1 and M2 can be attributed to slowdown in demand deposits and currency outside banks. Growth in currency outside banks slowed down from 25.6% in 2011 to 11% in 2012 whereas demand deposits growth slowed down from 20.9% to 17.6% during the period. On the other hand, time and savings deposits accelerated from 2.4% to 6.2%. Growth in other Quasi-monetary deposits also moved up significantly from 0.4% in 2011 to 16% in 2012. Credit and deposit growth The flow of credit from commercial banks to private sector in the Saudi economy remains strong. Commercial banks total claims on private sector grew at 15.9% YoY in January compared to 16.4% YoY in December. Loans, advances and overdrafts increased 16.2% YoY whereas investment in private securities moved up 14. YoY in January. On the monthly basis, loans, advances and overdrafts increased 1.3% in January. Overall, commercial banks claims on private sector moved up 1.2% MoM supported by 1.4% MoM rise in investment in private securities. Credit growth in 2012 was higher at 16.4% compared to 10.6% in 2011. Total outstanding credit to the private sector stood at SAR999bn at the end of the last year. Disclosures Please refer to the important disclosures at the back of this report. 3

Loans, advances and overdrafts stood at SAR951bn and investment in private securities was SAR38.6bn at the end of December 2012. In terms of GDP, loans, advances and overdrafts was just 3 in 2012. However, the ratio was almost 10 if we took non-oil private sector GDP instead of total GDP. Although deposits growth accelerated, it remained below credit growth Deposits growth also eased a bit from 14.2% YoY in December to 13.7% YoY in January. On the monthly basis, deposits growth was just 0.4% due to decline in time and savings deposits. Demand deposits grew by 1.1% MoM in January against a solid growth of 6.9% MoM in December. Time and savings deposits growth turned around from 4.7% MoM in December to -0.3% MoM in January. Figure 6 Foreign assets rise further 2,700 SAR billion YoY 2,500 2,300 2,100 1,900 1,700 1,500 Foreign reserve assets Growth-rhs 3 2 1 Foreign reserve assets of SAMA Foreign reserve assets increased SAR21bn in January to reach at SAR2484bn. The composition of the reserves also witnessed an adjustment. Investment in foreign securities increased from SAR1670bn in December to SAR1735bn in January whereas foreign currency and deposits declined from SAR734bn to SAR689bn during the period. In the entire year of 2012 the assets have increased by SAR434bn, an increase of 21.4% from 2011 levels. Investment in foreign securities constituted 68% of the total reserve assets whereas foreign currency and deposits abroad constituted 3. Remaining reserves were held as Special Drawing Rights (SDR), gold and reserves with IMF. The foreign reserve asset is almost 9 of GDP which provides strong support to the external sector of the country. Moreover, the reserve can finance more than four years of import at the current rate of around SAR540bn per year. Disclosures Please refer to the important disclosures at the back of this report. 4

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