Research Department ARC Research Team Tel 966 11 211 9370, research@alrajhi-capital.com Saudi Arabian economy Saudi Arabian Economy The IMF executive board maintained the Kingdom s real GDP growth outlook for 2016 at 1.2%, but marginally raised 2017 outlook to 2% from 1.9% earlier. Medium term growth is estimated to be in the range of 2.25-2.5%. Fiscal deficit is expected to reduce to 13% in 2016. World Bank has raised its crude oil price forecast to US$43/barrel for 2016, compared to US$41/barrel predicted in April, owing to supply disruptions and strong demand in the second quarter. Saudi Arabia non-oil manufacturing PMI rose to an eight-month high of 56.0 in July 2016 from 54.4 in June 2016. Foreign reserve assets slipped 1.9% m-o-m in June 2016, after a marginal 0.1% m-o-m increase in May, as the government tapped its foreign reserves to finance the budget deficit. POS transactions rose slightly, while ATM withdrawals witnessed a double digit y-o-y growth in June 2016 for the first time since August 2015. Bank credit to the private sector continued to slow down in June (+8.1% y-o-y), which may be attributable to seasonal impact of Ramadan as well as rising SAIBOR. Meanwhile, deposits declined for the fifth consecutive month (-3.3% y-oy), though it was stable m-o-m. The loan-to-deposit ratio reached its highest level since November 2008. On the equity front, TASI declined 3.0% m-o-m in July 2016, as falling oil prices dragged the index lower. Foreign Reserve Assets: Foreign reserve assets declined 15.2% y-o-y in June 2016, its 17 th straight month of decline, compared to a 14.5% y-o-y fall in May. Foreign reserve assets have fallen to their lowest level since April 2012. On a m-o-m basis, foreign reserves assets were down 1.9% in June, compared to a 0.1% m-o-m increase in May 2016. The government is taking steps to ease the pressure on foreign reserves by borrowing funds from abroad to cover the deficit. Key indicators: KSA s crude oil production slipped 1.3% y-o-y in July 2016. Brent September futures dropped 14.6% m-o-m to reach US$ 42.46 / barrel at the end of July 2016. Money supply (M3) declined 2.6% y-o-y in June 2016, while inflation rose by 4.1% y-o-y in June. Point of sale transactions (POS) rose by 2.7% y-o-y, while ATM cash withdrawals grew sharply by 10.7% y-o-y in June 2016. Crude price outlook: The US Energy Information Administration (EIA), in its July 2016 report, estimated Brent crude oil prices to average around US$44/barrel in 2016 and US$52/barrel in 2017. Table 1 Key macro indicators Variable Jun-16 May-16 2015 2014 Inflation Rate (2007=100) 4.1% 4.1% 2.2% 2.7% Average Oil Price (Arab Light) (US$/Barrel) 46.3 43.5 49.9 97.1 Money Supply (M3) -2.6% -3.2% 2.6% 11.9% Total Banking Sector Claims 15.3 16 10.5 11.3 Interbank Interest Rate (3 Month) (BP) 2.208 2.099 0.88 0.936 Repo Rate (BP) 2.00 2.00 2.00 2.00 Reverse Repo Rate (BP) 0.5 0.5 0.5 0.25 Source: SAMA, * Provisional Q1 2016* Q4 2015* 2015* 2014* GDP Rate at Constant Prices (2010=100) 1.5% 1.8% 3.5% 3.6% Current Account to GDP Ratio (current prices) -11.9% -15.8% -8.3% 9.8% Total Imports (fob) to GDP Ratio (current prices) 21.5% 25.5% 24.0% 21.0% Non-oil Exports to GDP Ratio (current prices) 7.2% 8.2% 7.6% 7.7% 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. 1
According to the IMF, the Kingdom is expected to grow by 1.2% in 2016 IMF outlook for Saudi Arabia The IMF Executive Board welcomed the ambitious reform goals announced as part of Vision 2030 and the National Transformation Program during the current challenging period of falling oil prices. They also highlighted the need for continued fiscal adjustment and reforms to strengthen and transform the Saudi Arabian economy. Directors noted that the US dollar exchange rate peg is the best option for the Kingdom and pointed that continued fiscal adjustment is required to support the peg. The IMG maintained Saudi Arabia s real GDP growth expectation at 1.2% for 2016, but marginally raised 2017 growth expectation to 2% from 1.9% earlier. The institution forecasts medium-term growth for the Kingdom to be in the range of 2.25-2.5%. The fiscal deficit in 2016, based on the current policies, is expected to be reduced to 13% of GDP, as compared to 15.9% in 2015, while the current account deficit is expected to be decreased to 6.4% of GDP in 2016, versus 8.3% in 2015. Further, the Board noted that the Kingdom s financial system has improved owing to the reforms undertaken by the government and the Kingdom s banking sector is in a better position to withstand lower oil prices and slower growth. Crude oil prices dropped in July 2016 owing to the global supply glut Crude oil dynamics Crude oil prices (Brent September futures contract) declined 14.6%, on a monthly basis in July 2016, as compared to a monthly drop of 1.2% in June 2016. Crude oil prices dropped in July owing to the oversupply in the market as OPEC countries ramped up crude oil production coupled with the US adding 44 oil rigs (total count 374 oil rigs) in July, recording the highest monthly rise in US oil rigs in two years, suggesting that the US oil production may increase in the coming months. Further, the unexpected rise in US crude oil inventory for the last two weeks of July, after 9 consecutive weeks of decline in US stockpiles, also negatively impacted crude oil prices. WTI (September futures contract) and Arab light dropped 15.1% m-o-m and 14.1% m-o-m respectively in July 2016. The Kingdom s crude oil production dropped 1.3% y-o-y in July 2016, as compared to a yearly rise of 0.2% in June 2016. Figure 1 Saudi crude oil production trend Figure 2 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% 1 8.0% 6.0% 4.0% 2.0% -2.0% -4.0% -6.0% 120 110 100 90 80 70 60 50 40 30 20 Source: Bloomberg, Al Rajhi Capital Saudi Crude oil production growth Source: Bloomberg, Al Rajhi Capital Brent WTI Arab Light Disclosures Please refer to the important disclosures at the back of this report. 2
Table 2 Non-Oil Exports Commodities (SAR mn) Feb-16 Mar-16 Apr-16 % y-o-y % m-o-m Plastics & Rubbers 3,967 1,696 4,412-9.1% 160.1% Chemical Products 3,333 3,699 3,381-35.5% -8.6% Ordinary Metals 1,110 1,008 1,183-8.3% 17.4% Transport Equipments 1,495 1,287 1,157-14.0% -10.1% Others 3,255 7,386 3,314-11.8% -55.1% Total 13,160 15,076 13,447-18.4% -10.8% Figure 3 Components of non-oil exports Figure 4 Export Destinations 7.5% 24.6% 32.8% 17.0% 8.6% 4.5% 65.0% 5.9% 8.8% 25.1% Plastics & Rubbers Chemical Products Ordinary Metals Transport Equipments Others China UAE Singapore India Others Table 3 Non-Oil Imports Commodities (SAR mn) Feb-16 Mar-16 Apr-16 % y-o-y % m-o-m Machinery & Electricals 11,193 10,740 9,468-37.4% -11.8% Transport Equipments 7,059 8,668 7,886-18.0% -9.0% Ordinary Metals 3,582 4,380 3,798-38.1% -13.3% Chemical Products 4,058 4,080 3,574-14.4% -12.4% Others 14,793 16,176 16,044-23.4% -0.8% Total 40,685 44,044 40,770-27.2% -7.4% Disclosures Please refer to the important disclosures at the back of this report. 3
Figure 5 Components of non-oil imports Figure 6 Source countries 13.1% 23.2% 39.4% 13.0% 19.3% 61.2% 6.4% 6.3% 8.8% 9.3% Machinery & Electricals Transport Equipments Ordinary Metals Chemical Products Others China USA Germany Japan Others Figure 7 Non-oil export trend (y-o-y) 8 6 4 2-2 -4 Figure 8 Non-oil import trend (y-o-y) 6 5 4 3 2 1-1 -2-3 Non-oil Export Non-oil Import Disclosures Please refer to the important disclosures at the back of this report. 4
Money supply (M3) dropped, on a yearly basis for the fifth consecutive month Monetary and credit indicators Money supply The broader money supply (M3) declined at a slower pace of 2.6% y-o-y in June 2016 it stood at SAR1,774bn, as compared to a yearly drop of 3.2% in May 2016. The sharp annual rise in time and savings deposits in June 2016 was partially offset by further annual decline in demand deposits. However, on a monthly basis, M3 advanced 0.7% in June 2016 as compared to a fall of 0.4% m-o-m in May 2016. Figure 9 Money supply growth (y-o-y) 25.0% 2 15.0% 1 5.0% -5.0% -1-15.0% Figure 10 Deposits break-up 1,200 1,000 800 600 400 200 0 M1 M2 M3 Time and Saving Deposits Demand Deposits The loan-to-deposit ratio in June 2016 crossed the 90% mark Credit and deposit growth Total credit growth (banks claim on the private sector) eased to 8.1% y-o-y in June 2016, as compared to 9.4% y-o-y in May 2016. Meanwhile, the deposits declined 3.3% in June 2016, registering a steady decline compared to the previous month. On a monthly basis, credit allocated to the private sector grew by 0.4% in June 2016 (0.7% m-o-m in May), which was in line with the historical trend of subdued private lending activity during the Ramadan period. Meanwhile, deposits advanced by 0.1% m-o-m in June 2016 (-0.5% m-o-m in May), backed by higher deposits from the private sector. The loan-to-deposit ratio stood at 90.2% in June 2016, versus a reading of 89.9% in May 2016. Disclosures Please refer to the important disclosures at the back of this report. 5
Figure 11 Credit and deposit growth Figure 12 Loans to deposits 2 15.0% 1 5.0% -5.0% 92% 90% 88% 86% 84% 82% 80% 78% 76% 74% 72% Deposits Credit Loans to Deposit ratio Foreign reserve assets dropped in June 2016 registering its lowest level since April 2012 Foreign reserve assets Foreign reserve assets declined y-o-y for the 17 th consecutive month in June 2016. The assets dropped by 15.2% y-o-y and stood at SAR2,138bn (~US$570bn) at the end of June. The fall in the oil prices has prompted the Kingdom to tap its foreign reserve assets in order to finance its budget deficit. The Kingdom has been trying to ease the fall in reserves by borrowing funds from outside the KSA to cover its deficit. The government is in the process of issuing its first international bond of approximately US$10bn in the coming months. On a monthly basis, foreign reserves declined 1.9% in June, versus a monthly rise of 0.1% in May. Further, foreign deposits abroad dropped 3.1% m-o-m in June, as compared to a monthly rise of 7.4% in May, while investments in foreign securities declined 1.3% m-o-m in June, versus a drop of 3.4% m-o-m in May 2016. Figure 13 Foreign reserves Figure 14 Major components of foreign assets 3,000 2,500 2,000 1,500 1,000 500 0 2 15.0% 1 5.0% -5.0% -1-15.0% -2 2,500 2,000 1,500 1,000 500 0 Foreign Reserves Assets Foreign Currency & Deposits Abroad Investment in Foreign Assets Disclosures Please refer to the important disclosures at the back of this report. 6
Inflation in the Kingdom rose by 4.1% (y-o-y) in June 2016 Figure 15 Inflation trend (y-o-y) Inflation dynamics The general index of cost of living grew by 4.1% y-o-y in June 2016, registering the same reading as in May 2016. The transport segment rose at a slower pace of 10.2% y- o-y in June as compared to a rise of 11.3% y-o-y in May, while inflation in housing, water, electricity & gas segment grew by 7.2% y-o-y in June, versus a rise of 7.7% y-o-y in May. Further, the rise in the food & beverages segment was slowed down to 0.1% y- o-y in June, versus a yearly rise of 0.3% in May, while the furnishing, household equipment and maintenance segment rose at the same pace of 2.7% y-o-y in June, as in May. A few segments like clothing & footwear, health, communication, etc grew at a faster yearly rate in June as compared to the previous month. On a monthly basis, the overall inflation logged a 0.3% rise in June, as compared to the neutral reading of in May 2016. Figure 16 Inflation drivers (y-o-y) 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 14.0% 12.0% 1 8.0% 6.0% 4.0% 2.0% -2.0% -4.0% General Index Food And Beverages Transport Furnishings, Household Housing, Water, Electricity, Gas Source: GAS, Al Rajhi Capital Benchmark Index TASI dropped 3.0% m-o-m in July 2016 Figure 17 Tadawul index performance Source: GAS, Al Rajhi Capital Stock market indicators The benchmark index (TASI) declined 3.0% m-o-m in July 2016, as compared to a monthly rise of 0.8% in June 2016. The overall index was dragged down by sectors such as Telecom, Media, Cement, Retail and Multi-Investment which dropped 7.3%, 7.0%, 6.9%, 5.8% and 5.6% respectively. Al Sagr Cooperative Insurance Co. was the top performer on the index, delivering a monthly return of 32.31% in July 2016. Figure 18 TASI one year historic 12-month forward P/E chart Index 6800 Million 350 15.0x 6700 300 14.0x 6600 6500 6400 6300 6200 6100 250 200 150 100 50 0 13.0x 12.0x 11.0x 10.0x 9.0x 8.0x Volume RHS TASI Source: Bloomberg, Al Rajhi Capital, Data from 30 th June 2016 to 31 st July 2016 Source: Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 7
Figure 19 Top 5 Sectors MoM Figure 20 Bottom 5 sectors MoM 2.0% 1.5% 1.0% 0.5% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% -3.5% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% -8.0% Source: Tadawul, Al Rajhi Capital, MoM returns for July 2016 Source: Tadawul, Al Rajhi Capital, MoM returns for July 2016 Table 4 Top 5 Gainers for the month of July Name Monthly Return Market cap () Avg volume (mn) Sectors Al Sagr Cooperative Insurance Co 32.3% 1.2 1.8 Insurance Saudi Transport and Investment Co 21.3% 1.1 0.4 Transport United Wire Factories Co 16.5% 1.2 0.2 Building & Construction Arriyadh Development Co 11.0% 3.0 0.8 Real Estate Development The Company for Cooperative Insurance 4.2% 9.4 0.1 Insurance Source: Bloomberg, Al Rajhi Capital, Companies with market cap more than SAR 1bn Table 5 Top 5 Losers for the month of July Name Monthly Return Market cap () Avg volume (mn) Sectors Aseer Trading Tourism & Manufacturing Co -17.9% 1.9 0.2 Multi-Investment Yamama Cement Co -16.6% 4.7 0.6 Cement Saudi Ceramic Co -14.8% 1.7 0.3 Building & Construction Mobile Telecommunication Company Saudi A -14.0% 3.9 3.6 Telecommunication & Information Technology Jarir Marketing Co -13.6% 9.2 0.1 Retail Source: Bloomberg, Al Rajhi Capital, Companies with market cap more than SAR 1bn Consumer spending indicators Saudi Arabia PMI advanced to its 8 month high in July 2016 Saudi Arabia s non-oil private sector witnessed an improvement in July 2016, as the Emirates NBD PMI stood at an eight-month high of 56.0, versus 54.4 in June 2016. The growth in the economic activity in July was owing to a faster rise in output and new orders. Point-of-sale (POS) transactions rose at a slower yearly pace of 2.7% in June 2016, versus a rise of 5.8% y-o-y in May. Further, ATM cash withdrawals advanced sharply by 10.7% y-o-y in June, as compared to a yearly rise of 1.1% in May 2016. Disclosures Please refer to the important disclosures at the back of this report. 8
Figure 21 Point-of-sale transactions (POS) trend Figure 22 ATM cash withdrawals trend 20.0 50% 80.0 50% 18.0 16.0 14.0 12.0 40% 30% 20% 70.0 60.0 50.0 40% 30% 20% 10.0 10% 40.0 10% 8.0 6.0 4.0 2.0 0% -10% -20% 30.0 20.0 10.0 0% -10% -20% - -30% - -30% POS ATM Cash withdrawals Figure 23 Emirates NBD Saudi PMI Index Figure 24 Consumer spending trend (POS and ATM cash Withdrawals) 64 62 60 58 56 54 52 50 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0-48 POS ATM Cash withdrawals Source: Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 9
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