Md. Rahmatullah Khan, Economic analyst Tel: +966 2 939, khanmr@alrajhi-capital.com Saudi Arabian economy Saudi Arabian economy Saudi crude production less synchronized with global growth Crude oil production in Saudi Arabia inched up a bit to 9. mbpd in February as estimated by the OPEC. Brent crude price eased to the range of US$08-US$2 per barrel in March after peaking above US$20 per barrel in February. The average price has been US$0.4 per barrel in March ( st 25 th Mar), lower than average price of US$6.3 per barrel last month. IEA expects non-opec supply to grow by. mbpd in 203 as against expectation of a rise in demand by 820 tbpd. Global crude supply seems to be influenced by global economic growth. However, domestic crude production in Saudi Arabia seems to be less synchronized with global economic growth. The main destinations of Saudi crude export have also moved from West to East. Almost two third of the Saudi crude export goes to the Asian and Far East countries. Real economic indicators: Real economic indicators in Saudi Arabia remain robust as crude production has inched up and non-oil trade were positive. According to OPEC estimates, crude production inched up to 9. mbpd in February compared to 9.05 mbpd in January. Brent crude price eased in March to an average of US$0.4 per barrel compared to US$6.3 per barrel in February. Global demand and supply dynamics in crude market seem to be evenly poised, as prices reflect through largely being range bound. Non-oil exports growth moderated in January after a rebound in December. It grew 2.9% YoY to reach SAR5.bn. Total imports also grew at 0. 2% YoY, a moderate pace in January compared to 23.% YoY in December. Inflation remained unchanged at 3.9% in February as rise in food inflation was compensated by decline in rent inflation. Table. Macroeconomic Indicators for Saudi Arabia 200 20 202E 203F 204F Real GDP ( growth) 4.7% 8.5% 6.8% 3.3% 4.5% Nominal GDP (SAR billion) 975 25 2727 2763 2995 Inflation (monthly average) 5.3% 5% 4.5% 4.2% 4% Revenue (SAR billion) 735 0 239 030 23 Expenditure (SAR billion) 627 804 853 904 967 Fiscal Balance (SAR billion) 87 306 386 26 56 Trade balance (SAR billion) 54 883 005 669 678 Current account (SAR billion) 250 594 669 329 328 Current account (% of GDP) 2.6% 23.6% 24.5%.9% 0.9% Disclosures Please refer to the important disclosures at the back of this report.
Real economic indicators Figure Crude production in Saudi Arabia remains around 9mbpd 30 20 0 00 90 80 USD per barrel million barrel per day 0.5 0.0 9.5 9.0 8.5 WTI Arab Lights Brent KSA production-rhs Source: OPEC, Al Rajhi Capital Domestic crude production and global price Crude production in Saudi Arabia inched up a bit but remained around 9 million barrel per day in February. OPEC estimates suggest that the domestic production was 9. mbpd last month compared to 9.05 mbpd in January. Although on the monthly basis production was higher, it remains significantly lower compared to a yearly basis. The production was lower by 5.9% and 7.3% in January and February respectively this year compared to respective months in 202. This continues to evolve as expected as we see production slowly moving up as summer approaches. We continue to maintain our expectation of average daily production in the country at 9.3 mbpd for the entire year of 203. Global crude prices reached a cyclical high in the middle of February. However, since then the prices have eased to their recent trading range. Average Brent crude price was US$6.3 per barrel in February, 2.9% higher compared to average price in January. It has eased to an average of US$0.4 per barrel in between st and 25 th March. Other benchmark crude price indices such as WTI Nymex and Arab Lights have also exhibited similar pattern. Global demand and supply dynamics in crude market seem to be evenly poised, as reflected through largely range bound prices. According to International Energy Agency, global crude supply increased by 90 thousand barrel per day (tbpd) in February mainly because of rise in OPEC supply by 50 tbpd. On the other hand, non- OPEC supply declined by 60 tbpd during the month. For the entire year of 203, the Agency expects demand growth to be 820 tbpd whereas it expects increase in supply from non-opec to be. mbpd. The reserve situation also seems to be improving as OECD commercial holding rebounded by 22.5 million barrel in January. Figure 2 Global crude production exhibits strong relationship with global growth 6. 4. 2. 0. -2. -4. Deviation of global growth from 3% Change in global crude production Source: IEA, IMF, Al Rajhi Capital Figure 3 Domestic crude production does not exhibit strong relationship with global growth 4. 2. 0. -2. -4. Deviation of global growth from 3% Change in crude production in KSA-rhs 6 4 2-2 -4 Global business cycle and domestic crude production Average crude production in Saudi Arabia was 9.7 million barrel per day in 202, highest since 98. This is counter intuitive especially when global growth slowed last year. Moreover, the change in global crude production exhibits close relationship with the global economic growth. The adjoining chart reflects that global crude supply reacts to the weakness in global growth. In most years, when global growth has come down below 3%, crude production has also declined either in the same year or in succeeding year. Even in 99-93 period when global economic (real GDP) growth was less than 3%, global crude production declined in 99 and remained largely flat in the succeeding two years. The production recovered only in 994 when global growth also recovered. Since 984 till now, global growth has dipped below 3% in nine years, and global crude production has also declined in six years. The strong relationship is also confirmed through statistical analysis. The correlation between global growth deviation (actual growth minus 3%) and change in global crude production is 49% during the period of 984-202. However, the relationship between crude production in Saudi Arabia and global growth is not as strong as in the above case. The correlation between the two is just 3% for the period of 984-202. The domestic crude production has also declined in five years which witnessed global growth dipping below 3%, but the change in the domestic production is not as synchronized as global production. The destination of crude export from Saudi Arabia has also been moving from West to East. The proportion of crude export going to the US and Western Europe has been steadily declining in the last two decades. On the other hand, the proportion of crude export going to Asian countries has increased significantly in the same period. The proportion of the export going to Asian and Far East countries has increased from 36% in 990 to 64% in 200 (Figure 6). Source: Ministry of Petroleum and Mineral, IMF, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 2
Figure 4 Domestic crude production and global growth Figure 5 Global crude production and global growth 2.0 mbpd % 6 95 mbpd 6 0.0 8.0 5 4 90 85 80 5 4 6.0 3 2 75 70 3 2 4.0 2.0 0 65 60 55 0 0.0-50 - Crude production in KSA Global growth-rhs Global growth Global crude production Source: Ministry of Petroleum and Mineral, IMF, Al Rajhi Capital Source: IEA, IMF, Al Rajhi Capital Figure 6 Changing destination of crude export 7 6 5 4 3 2 970 975 980 985 990 995 2000 2005 200 Source: Ministry of Petroleum and Mineral, Al Rajhi Capital North America Western Europe Asia and far East Figure 7 Non-oil trade growth moderates in January 8 6 4 2-2 -4 Non-oil export growth Total import growth Non-oil foreign trade growth moderates Growth in non-oil trade moderated in January after a turnaround in December. Nonoil export growth was 2.9% YoY in January compared to 7.9% YoY in December. Similarly, total import growth decelerated to 0.2% YoY in January compared to 23.% YoY in December. However, on monthly basis both non-oil export and total import were down in January compared to December levels. The ratio of non-oil export to total import was 30.3% in January compared to average of 32.6% in 202. The value of non-oil export was SAR5.bn comprising mainly petrochemicals and plastics. Export of petrochemical products was valued at SAR5.4bn, constituted almost 36% of the non-oil export, and grew at 4.8% YoY. However, on the monthly basis, petrochemical export declined sharply from SAR6.3bn in December 202 to SAR5.4bn in January 203. Plastics and rubbers was the second major non-oil export category, valued at SAR4.6bn, and constituted 30.6% of non-oil exports. Plastic and rubber export witnessed a decline of 5.5% YoY in January. The decline was sharper at 2 on monthly basis as the value of the export declined from SAR5.8bn in December to SAR4.6bn in January. The performance of other categories of export was mixed as some categories witnessed a rise and some other witnessed a decline. Total import touched to SAR49.7bn in January, 0.2% higher than same month a year ago. However, it was slightly lower compared to SAR50.5bn, the level in December. Machinery and equipment, electrical appliances remains a major component of imports, constituting 28% of total imports in January. The value of the machinery Disclosures Please refer to the important disclosures at the back of this report. 3
import was SAR4.04bn in January, 4% higher compared to the levels in the same month last year. Transportation equipment and related parts constituted 2.5% in total imports, declined 0.6% YoY. Other group of imports which witnessed decline in January were food & beverages and plant products. However, import categories such as chemical products, live animals, plastics and rubber, textiles and optical instruments, medical equipment and watches witnessed rise in January compared to the same month last year. Figure 8 New series revises down the price rise in recent years 2% 8% 6% 4% 2% -2% -4% Inflation Since Central Department of Statistics and Information (CDSI) has not published inflation index 999=00, so we move to the new index which has base in 2007 at 00. According to the new index, inflation was unchanged at 3.9% YoY in February same as in the previous month. Food inflation was 6.3% YoY whereas rent etc inflation was just 3.8% in the month. The biggest jump was in transport component which rose by 8.6%. The new index exhibits lower inflation, especially in recent years, compared to the inflation registered by the old index. According to the new index, average inflation was 2.9% in 202 whereas it was 4.5% as measured by the old index. Movement in the food component of inflation remains similar in both the indices. According to the new index, average food inflation was 4.6% in 202 whereas old index put it at 4.4%. However, another important component of inflation, rent diverges in the two indices again in recent years. Both indices show almost similar low rent inflation prior to 2007. However, sudden and sharp jump of rent inflation in the new index is modest compared to the same in old index. Moreover, the new index shows moderation in rent inflation rather sharp and sudden in 202 compared to the old index. Figure 9 No revision in food inflation by the new index Figure 0 New index revises down rent inflation in recent years 6% 4% 2% 8% 6% 4% 2% -2% -4% -6% 2 5% 5% -5% Disclosures Please refer to the important disclosures at the back of this report. 4
Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company ( Al Rajhi Capital ) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction. Contact us Tel : +966 2 939 research@alrajhi-capital.com Al Rajhi Capital Head Office, King Fahad Road P.O. Box 556, Riyadh 432 Kingdom of Saudi Arabia Email: research@alrajhi-capital.com Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37. Disclosures Please refer to the important disclosures at the back of this report. 5