Research Department ARC Research Team Tel 966 11 211 9370, research@alrajhi-capital.com Saudi Arabian economy Saudi Arabian Economy The Kingdom s Q1 2016 GDP grew at the slowest pace in three years as low oil prices led to slowdown in government spending and lower subsidies likely affecting consumer spending. However, even as Saudi Arabia PMI fell m-o-m in June, it stood at a robust 54.4, indicating growth in the non-oil sector. Foreign reserve assets rose on a monthly basis for the first in 16 months, which could possibly be due to new foreign loans raised by the government. POS transactions grew for the first time in four months in May 2016. Bank credit to the private sector rose year-on-year in May 2016, albeit at a slower pace compared to the previous month, while the deposits declined at a faster pace thereby pushing the loan-to-deposit ratio to 89.9%, its highest level since November 2008. Saudi Arabia s crude oil exports fell to its lowest levels in six months in April 2016 despite high production level, as more oil was used to cater to domestic demand and lower demand from overseas refineries owing to seasonal maintenance. The Kingdom s non-oil exports and imports declined at a faster pace in April 2016, on a yearly basis, as compared to the previous month. On the equity front, TASI edged up 0.8% on a monthly basis in June 2016, brushing aside the aftershocks from Brexit. Trading volume on the exchange was muted in June 2016 owing to Ramadan. Foreign Reserve Assets: Foreign reserve assets rose on a monthly basis in May 2016, the first increase in 16 months. On a yearly basis, the decline in foreign reserve assets eased slightly in May 2016 (-14.5% y-o-y) as compared to the previous month (-15.5% y-o-y). The monthly rise in the reserves could be due to the planned government bond issuance by the Kingdom to cover its budget deficit. Further, measures taken by the government to prioritize expenses also seems to have helped reduce reliance on foreign reserves to cover deficit. Key indicators: KSA s crude oil production fell 1.1% y-o-y in June 2016. Brent September futures declined 1.2% m-o-m to reach US$ 49.71/ barrel at the end of June 2016. Money supply (M3) dropped 3.2% y-o-y in May 2016, while inflation rose by 4.1% y-o-y in May. Point of sale transactions (POS) grew 5.8% y-o-y, while ATM cash withdrawals rose by 1.1% y-o-y in May 2016. Crude price outlook: The US Energy Information Administration (EIA), in its June 2016 report, estimated Brent crude oil prices to average around US$43/barrel in 2016 and US$52/barrel in 2017. Table 1 Key macro indicators Variable May-16 Apr-16 2015 2014 Inflation Rate (2007=100) 4.1% 4.2% 2.2% 2.7% Average Oil Price (Arab Light) (US$/Barrel) 43.5 38.2 49.9 97.1 Money Supply (M3) -3.2% -1.5% 2.6% 11.9% Total Banking Sector Claims 16 15.6 10.5 11.3 Interbank Interest Rate (3 Month) (BP) 2.099 1.912 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 Q4 2015* Q3 2015* 2015* 2014* GDP Rate at Constant Prices (2010=100) 1.8% 4.0% 3.5% 3.6% Current Account to GDP Ratio (current prices) -15.8% -6.6% -8.3% 9.8% Total Imports (fob) to GDP Ratio (current prices) 25.5% 23.5% 24.0% 21.0% Non-oil Exports to GDP Ratio (current prices) 8.2% 7.7% 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
Q1 2016 GDP grew at the slowest pace in three years mainly due to slowdown in non-oil government and private sector Crude oil export declined to 7.44 mbpd in April 2016, as compared to 7.54 mbpd in March 2016 Gross Domestic Product As per the latest GDP data released by CDSI, the Kingdom s GDP for Q1 2016 grew by 1.54% y-o-y (Q1 2015: 3.27% y-o-y), recording its weakest pace in three years. The GDP growth rate slowed as low oil revenues led to slowdown in government spending and revision in subsidies, which increased costs for corporate as well as individuals. The oil sector grew 5.14% y-o-y in Q1 2016, versus a 0.21% y-o-y in Q1 2015, as the Kingdom raised crude oil production and exported more refined products. Meanwhile, the non-oil sector shrank 0.67% y-o-y in Q1 2016, as compared to a yearly rise of 5.66% in Q1 2015, owing to a sharp decline in the non-oil government and private sector. This is partly attributable to the high base effect of Q1 2015, when a 2-month salary bonus paid by the government and some corporate boosted spending. Crude oil dynamics As per the data released by Joint Organization Data Initiative, Saudi Arabia s crude oil exports fell in April 2016 to the lowest levels in six months, despite higher production, as more oil was used for power generation on the domestic front. Lower demand from overseas refineries which were shut for maintenance in April and May also negatively impacted Kingdom s crude oil exports. Crude exports declined to 7.44 million barrels per day (mbpd) in April 2016 vs. 7.54 mbpd in March 2016. Moreover, the Kingdom s crude oil inventory from domestic as well as overseas storage facilities, declined to the lowest levels since August 2014. The inventory fell to 290.9 million barrels in April, versus 296.7 million barrels in March, owing to increased sales in the spot market. Table 2 Crude Oil Exports Country Mar-16 Apr-16 y-o-y m-o-m Saudi Arabia 7.541 7.444-3.8% -1.3% Russia 5.161 - - - Iraq 3.809 3.364 9.3% -11.7% Canada 2.278 2.449 0.3% 7.5% Kuwait 2.198 2.027 5.2% -7.8% Source: JODI Data, Al Rajhi Capital, Data For Russia April-2016 not released. Figure 1 Gulf Crude oil exporters Mbpd 9 8 7 6 5 4 3 2 1 0 Figure 2 Global Crude oil exporters Mbpd 6 5 4 3 2 1 0 Iraq Kuwait Iran Saudi Arabia Source: JODI Data, Al Rajhi Capital, Data for Iran not released since February 2016. Russia Canada Norway Mexico Source: JODI Data, Al Rajhi Capital. Data for Russia April 2016 not released. Disclosures Please refer to the important disclosures at the back of this report. 2
Crude oil prices declined in June 2016 Crude oil prices (Brent September futures contract) dropped 1.2% m-o-m in June 2016, as compared to a monthly rise of 4.6% in the previous month. The monthly fall in crude oil prices can be attributed to the gain in the US dollar following Britain s exit from the European Union and the restored crude oil production in Canada and Nigeria. Crude oil prices was also impacted by the rise in US oil rig count as well as easing concerns regarding supply outages in Norway. WTI (August futures contract) and Arab light declined 2.4% m-o-m and 0.2% m-o-m respectively in June 2016. The Kingdom s crude oil production slipped 1.1% y-o-y in June 2016, versus a yearly rise of 0.1% in May 2016. Figure 3 Saudi crude oil production trend Figure 4 Crude oil prices trend mbpd 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 YoY growth Source: Bloomberg, Al Rajhi Capital Brent WTI Arab Light Saudi Arabia s non-oil exports and nonoil imports in April dropped by 18.4% and 27.2% respectively. Non-oil foreign trade As per the latest foreign trade data released by CDSI, Saudi Arabia s non-oil exports dropped 18.4% y-o-y in April 2016, as compared to annual decline of 9.1% and 7.4% in March and February, respectively. The fall in non-oil exports can be primarily attributed to decline in exports of chemical products (-35.5% y-o-y), which constitute 25.1% of total exports, coupled with a 9.1% y-o-y fall in plastics & rubbers, which accounted for 32.8% of total exports. Meanwhile, non-oil imports dropped -27.2% on a yearly basis in April 2016, versus 25.6% y-o-y fall in March. The non-oil imports were dragged down by ordinary metals (-38.1% y-o-y) and machinery & electrical (- 37.4% y-o-y), which together account for 32.5% of the total non-oil imports. Meanwhile, UAE maintained its position as the topmost non-oil export destination (17.0% of the total exports), while China was at the foremost position of the non-oil imports destinations, constituting 13.1% of the total imports, closely followed by USA, which accounted 13.0% of the total imports. Disclosures Please refer to the important disclosures at the back of this report. 3
Table 3 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 5 Components of non-oil exports Figure 6 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 4 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. 4
Figure 7 Components of non-oil imports Figure 8 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 9 Non-oil export trend (y-o-y) YoY 8 6 4 2-2 -4 Figure 10 Non-oil import trend (y-o-y) YoY 6 5 4 3 2 1-1 -2-3 Non-oil Export Non-oil Import Money supply (M3) registered an annual decline in May 2016 for the fourth month in a row Monetary and credit indicators Money supply The broader money supply (M3) dropped at a faster pace of 3.2% y-o-y in May 2016, standing at SAR1,762bn, versus a fall of 1.5% y-o-y in April 2016. The sharper decline in money supply (M3) is due to a larger annual drop in money supply M1 and the subdued annual growth in other quasi-money deposits. However, on a monthly basis, M3 declined at a slower pace of -0.4% in May as compared to a fall of 0.5% m-o-m in April 2016. Disclosures Please refer to the important disclosures at the back of this report. 5
Figure 11 Money supply growth (y-o-y) 25.0% Figure 12 Deposits break-up SAR bn 1,200 2 15.0% 1 5.0% -5.0% 1,000 800 600 400 200-1 0 M1 M2 M3 Time and Saving Deposits Demand Deposits The loan-to-deposit ratio in May 2016 rose to its highest level since November 2008 Credit and deposit growth Total credit growth (banks claim on the private sector) eased slightly to 9.4% y-o-y in May 2016 (10.1% y-o-y in April 2016). Moreover, deposits dropped at a faster rate of 3.4% y-o-y in May 2016 as compared to a fall of 1.7% on a yearly basis in April. The drop in deposits is mainly due to fall in private sector deposits. On a monthly basis, credit given to the private sector rose by 0.7% in May 2016, whereas deposits declined by 0.5% m-o-m, leading to a rise in the loan-to-deposit ratio to 89.9% in May 2016, as compared to 88.7% in April 2016. Figure 13 Credit and deposit growth Figure 14 Loans to deposits YoY 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 recorded an improvement on a monthly basis for the first time in 16 months Foreign reserve assets Foreign reserve assets rose on a monthly basis for the first time in 16 months in May 2016. Foreign reserves advanced by 0.1% m-o-m in May, versus a monthly fall of 1.1% in April. Further, foreign deposits abroad rose by 7.4% m-o-m in May, as compared to a drop of 1.7% m-o-m in April. However, investments in foreign securities declined by 3.4% m-o-m in May, versus a fall of 0.8% on a monthly basis in April. The monthly Disclosures Please refer to the important disclosures at the back of this report. 6
rise in foreign reserves could be possibly due to the debt issuance to finance the Kingdom s budget deficit. Moreover, stable oil prices and measures taken by the Government to control spending has also seems to have helped the Kingdom to reduce its reliance on foreign reserves. On a yearly basis, the pace of decline of assets eased to 14.5% in May vs. yearly drop of 15.4% in April 2016. The Kingdom s foreign reserves stood at SAR2,180bn (~US$581bn) at the end of May 2016. Figure 15 Foreign reserves SAR bn 3,000 2,500 2,000 1,500 1,000 500 0 2 15.0% 1 5.0% -5.0% -1-15.0% -2 Figure 16 Major components of foreign assets SAR bn 2,500 2,000 1,500 1,000 500 0 Foreign Reserves Assets YoY Foreign Currency & Deposits Abroad Investment in Foreign Assets Inflation (y-o-y) edged down slightly in May 2016 as compared to the previous month Figure 17 Inflation trend (y-o-y) Inflation dynamics The general index of cost of living rose by 4.1% y-o-y in May 2016, as compared to a rise of 4.2% y-o-y in April 2016. Inflation in the Kingdom edged down as compared to the previous month as the transport segment rose at a slower pace of 11.3% y-o-y in May as compared to a rise of 12.5% y-o-y in April, along with the slow rise of 0.3% y-oy in food & beverages segment versus a 0.8% y-o-y rise in April. However, inflation in housing, water, electricity & gas segment advanced to 7.7% y-o-y as compared to 7.5% y-o-y in the previous month, followed by furnishing, household equipment and maintenance segment which also rose at the same yearly pace of 2.7% as in April. On a monthly basis, the overall inflation registered the same reading in May 2016, as it was in the previous month. Figure 18 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 Disclosures Please refer to the important disclosures at the back of this report. 7
Benchmark Index TASI gained 0.8% m- o-m in June 2016 Stock market indicators The benchmark index (TASI) advanced 0.8% m-o-m in June 2016, as compared to a monthly decline of 5.3% in May 2016. The overall index was driven by sectors such as Energy, Real Estate, Building & Constructions, Telecommunications and Cement which rose 18.6%, 10.1%, 4.1%, 1.7% and 1.5% respectively. Dar Al Arkan Real Estate Development Co. was the top performer on the index, registering a monthly return of 29.86% in June 2016. Figure 19 Tadawul index performance Figure 20 TASI one year historic 12-month forward P/E chart Index 6650 6600 6550 6500 6450 6400 6350 6300 Million 400 350 300 250 200 150 100 50 0 16.0x 15.0x 14.0x 13.0x 12.0x 11.0x 10.0x 9.0x 8.0x Volume RHS TASI Source: Bloomberg, Al Rajhi Capital, Data from 31 st May 2016 to 30 th June 2016 Source: Bloomberg, Al Rajhi Capital Figure 21 Top 5 Sectors MoM Figure 22 Bottom 5 sectors MoM 2 18.0% 16.0% 14.0% 12.0% 1 8.0% 6.0% 4.0% 2.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0% Source: Tadawul, Al Rajhi Capital, MoM returns for June 2016 Source: Tadawul, Al Rajhi Capital, MoM returns for June 2016 Disclosures Please refer to the important disclosures at the back of this report. 8
Figure 5 Top 5 Gainers for the month of June Name Monthly Return Market cap (SAR bn) Avg volume (mn) Sectors Dar Al Arkan Real Estate Development Co 29.9% 7.0 52.4 Real Estate Development National Gas & Industrialization Co 23.7% 2.0 0.8 Energy & Utilities Saudi Electricity Co 19.3% 81.5 4.8 Energy & Utilities Arriyadh Development Co 14.9% 2.7 0.6 Real Estate Development Saudi Real Estate Co 12.6% 2.6 0.9 Real Estate Development Source: Bloomberg, Al Rajhi Capital, Companies with market cap more than SAR 1bn Figure 6 Top 5 Losers for the month of June Name Monthly Return Market cap (SAR bn) Avg volume (mn) Sectors Saudi International Petrochemical Co -8.2% 4.8 0.3 Petrochemical Saudi Research & Marketing Group -7.5% 3.3 0.4 Media and Publishing Kingdom Holding Co -6.9% 41.2 0.4 Multi Investment National Shipping Co of Saudi Arabia/The -6.1% 15.2 1.6 Transport Abdulmohsen Alhokair Group for Tourism and -6.1% 2.2 0.6 Hotel & Tourism Source: Bloomberg, Al Rajhi Capital, Companies with market cap more than SAR 1bn Consumer spending indicators PMI edged down slightly in June, while POS witnessed improvement in May 2016 Saudi Arabia s non-oil private sector (Emirates NBD PMI) remained in the expansionary phase to register a reading of 54.4 in June 2016, as compared to a reading of 54.8 in May 2016. The rise in economic activity in June can be primarily attributed to the robust growth in output and new orders. Point-of-sale (POS) transactions advanced 5.8% y-o-y in May 2016 as compared to a fall of 1.4% y-o-y in April. Further, ATM cash withdrawals were up 1.1% y-o-y in May, versus a yearly drop of 1.2% in April. The rise in POS and ATM withdrawals were in tandem with the trend ahead of Ramadan. Disclosures Please refer to the important disclosures at the back of this report. 9
Figure 23 Point-of-sale transactions (POS) trend Figure 24 ATM cash withdrawals trend SAR bn 20.0 50% SAR bn 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 YoY ATM Cash withdrawals YoY Figure 25 Emirates NBD Saudi PMI Index Figure 26 Consumer spending trend (POS and ATM cash Withdrawals) 64 62 60 58 56 54 52 50 SAR bn 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. 10
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