Saudi Arabian Economy Economic Research Research Department ARC ResearchTeam, Tel. +966 1 211 9370, devassyp@alrajhi-capital.com IMF hikes Saudi Arabia s 2018 growth forecast The IMF raised Saudi Arabia s 2018 growth forecast to 1.9% (+1.7% projected earlier), on account of higher oil output amid firm crude oil prices and structural reforms. It projects the fiscal deficit to shrink from 9.3% of GDP in 2017 to 4.6% and 1.7% in 2018 and 2019, respectively. Post the increase in oil prices and exports, we expect oil revenues in Q2 to reach SAR134bn while for the full year we expect it to touch SAR547.5bn (11.3% higher than the budget target of SAR492bn). This is likely to lower deficit by 28% in 2018. Meanwhile, the economic indicators for June appear to be progressing well with SAMA foreign reserves showcasing a rise (+0.4% m- o-m) after a brief drop last month, driven by the recent debt issuances by the government. However, credit to the private sector edged down (-0.1% m-om) in June, whereas bank claims on the public sector increased (+0.4% m-om). Further, POS transactions continued its march upwards in June, backed by the Restaurants and Hotels and Food and Beverage segments. Meanwhile, remittances by Saudi nationals increased (+13.3% y-o-y) in June, while those from non-saudi nationals also recorded a rise (+1.7% y-oy). However, the cost of living index rose at a slower pace (+2.1% y-o-y) in June, weighed down by the fall in the Housing, Water, Electricity, Gas sector which constitutes around a quarter of the index. Overall, we continue to believe that higher oil output amid firm oil prices, along with improving non-oil sector will ensure a sustainable economic recovery in 2018. IMF increased the Kingdom s 2018 growth forecast to 1.9% (1.7% projected earlier), on the back of higher oil output coupled with structural reforms undertaken by the government. IMF kept the 2019 s growth forecast unchanged at 1.9%. Real Estate Price Index dropped by 1.5% y-o-y in Q2 2018 same as that in the previous quarter. The residential property prices dropped at a faster pace (-1.3% y-o-y in Q2 2018 Vs -0.2% y-o-y in Q1 2018). Meanwhile, the commercial (-2.6% y-o-y Vs -4.4% y-o-y) and agricultural (-0.3% y-o-y Vs - 0.4% y-o-y) property prices declined at a slower pace (Figure 2). Kingdom raised SAR 3.5bn in June via domestic sukuk issuance under the SAR-denominated sukuk program. The government sold SAR2.1bn of 5 year bonds, SAR 920mn of 7 year bonds and SAR 403mn of 10 year bonds. SAMA foreign reserves increased on a yearly basis (+0.9% y-o-y) for the third month in a row in June 2018, supported by the government s recent debt issuances. On a monthly basis, reserves witnessed, a rise after a brief fall, in June (Figure 7 & 8). Meanwhile, government reserves with SAMA stood at SAR 610.1bn (including government current account) as of June 2018, registering a monthly fall of 2.5%. Deposits declined 1.2% y-o-y (+1.3% m-o-m) in June, while credit to the private sector slipped 0.1% y-o-y (+0.4% m-o-m) in June. Meanwhile, for Q2 2018 the private sector credit rose by 0.2% y-o-y (+1.5% q-o-q). However, the Manufacturing & Processing, Building & Construction and Commerce sectors witnessed a fall (y-o-y basis) although at a slower pace in Q2 2018 (Figure 9, 10, 11 & 12). 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.
Kingdom has initiated a draft law on public-private partnership (PPP) to encourage foreign inflows. The law will provide a boost to investments, especially to the construction sector which in recent past has remained under pressure, as it will help increase investor confidence and improve transparency. S&P Dow Jones decided to upgrade Saudi Arabia to emerging market status in 2019. Tadawul (Saudi Stock Exchange) has been already awarded emerging market status by FTSE Russell and MSCI in March and June, respectively. Banking sector profits slipped 3.5% y-o-y to stand at SAR 3,158mn in June (+7.3% y-oy in May). The cumulative banking sector profits for the year stood at SAR 24,060mn, recording a rise of 8.3% y-o-y (Figure 16). Money Supply (M3) declined 0.8% y-o-y (+1.4% m-o-m) in June to SAR 1,804bn, compared to the annual rise of 0.6% in May, weighed down by the fall in M2 (-1.0% y-o-y). Meanwhile, as per the weekly money supply data, published by SAMA, M3 may remain steady in July (Figure 13). Point-of-sale (POS) transactions climbed 6.8% y-o-y in June (+22.3% y-o-y in May), supported by Restaurants and Hotels (+32.8% y-o-y) and Food and Beverage (+15.3% y-oy) segments. However, the ATM transactions declined, for the first time in seven months, by 4.4% y-o-y in June (Figure 4, 5 & 6). Remittances (Personal Transfers) by Saudi nationals rose 13.3% y-o-y in June after recording a brief drop in May, while remittances by non-saudi nationals increased 1.7% y-o-y in the same month (-2.2% y-o-y in May) (Figure 3). Crude oil prices (Brent September futures contract) slipped 6.2% MTD in July 2018, as Libya resumed its oil exports from its eastern ports. Further, reports suggesting that the US is mulling to tap its Strategic Petroleum Reserve also weighed on the prices (Figure 19 & 20). Kingdom s non-oil exports climbed for the 8th consecutive month, up by 14.3% y-o-y in May 2018 (+26.5% y-o-y in April 2018), whereas the non-oil imports declined 6.4% y-o-y in May (-3.3% y-o-y in April 2018) (Figure 21, 22, 23, 24 & 25). Cost of living index (base year 2013) increased at a slower pace of 2.1% y-o-y in June (+2.3% y-o-y in May), dragged down by the fall in the Housing, Water, Electricity, Gas sector which constitutes ~25.4% of the total index. On a monthly basis, the index rose (+0.1% in June) for the first time in four months (Figure 17 & 18). Crude price outlook: The US Energy Information Administration (EIA) in its July 2018 report estimated Brent crude oil prices to average US$73/barrel for 2018 and US$69/barrel for 2019. Disclosures Please refer to the important disclosures at the back of this report. 2
Figure 1 Key macro indicators Variable Jul-18 Jun-18 May-18 2017 2016 Inflation Rate (2007=100) % - 2.1% 2.3% -0.9% 2.0% Jul-18 Jun-18 May-18 2017 2016 Average Oil Price (Arab Light) (US$/Barrel) 69.5 74.1 74.6 52.6 41.0 Jul-18 Jun-18 May-18 2016 2015 Money Supply (M3) % - -0.8% 0.6% 0.2% 0.8% Total Banking Sector Claims - 5.4 5.1 3.8 9.1 Interbank Interest Rate (3 Month) % 2.609 2.505 2.416 1.811 2.067 Repo Rate % 2.50 2.50 2.25 2.00 2.00 Reverse Repo Rate % 2 2 1.75 1.50 0.75 General Share Price Index (1985=1000) - 12.0 18.8 0.2 4.3 Q1 2018* Q4 2017* 2017* 2016 GDP Rate at Constant Prices (2010=100) % - 1.2% -1.4% -0.9% 1.7% Q1 2018** Q4 2017* 2017* 2016 Current Account to GDP Ratio (current prices) % - 6.0% 4.3% 2.2% -3.7% Total Imports (fob) to GDP Ratio (current prices)% - 16.4% 16.5% 17.4% 19.8% Non-oil Exports to GDP Ratio (current prices) % - 8.2% 8.0% 7.4% 7.4% Source: SAMA, Bloomberg * Provisional **Estimated. Arab Light and Interbank interest rate data is as on 27 July 2018 and 29 July 2018, respectively. Real Estate Price Index Real Estate Price Index fell at in Q2 2018 According to the data released by GASTAT, real estate prices dropped by 1.5% y-o-y in Q2 2018 same as that in the previous quarter. The residential property prices dropped at a faster pace (-1.3% y-o-y in Q2 2018 Vs -0.2% y-o-y in Q1 2018). Meanwhile, the commercial (-2.6% y-o-y Vs -4.4% y-o-y) and agricultural (-0.3% y-o-y Vs -0.4% y-o-y) property prices declined at a slower pace in Q2 2018. Figure 2 Real Estate Price Index 100 90 80 70 60 50 40 30 20 10 0 General Index Residential Commercial Agricultural Q1 2018 Q2 2018 Remittance Remittances registered a rise in June 2018 Remittances (Personal Transfers) increased in June 2018, after recording a brief decline in May. Remittances from Saudi nationals rose 13.3% y-o-y (-16.7% y-o-y in May) to ~SAR 3.4bn in June 2018, while remittances from non-saudi nationals climbed 1.7% y-o-y (-2.2% y-o-y in May) to stand at SAR 10.6bn. Disclosures Please refer to the important disclosures at the back of this report. 3
Figure 3 Remittances SAR mn 16000 14000 12000 10000 8000 6000 4000 2000 12 10 8 6 4 2-2 -4 0 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18-6 Saudi Non-Saudi Saudi y-o-y change (RHS) Non Saudi y-o-y change (RHS) POS transaction continued to rise in June Consumer spending indicators POS transactions climbed 6.8% y-o-y in June 2018 compared to the yearly rise of 22.3% in May, whereas the ATM cash withdrawals slipped for the first time in seven months, by 4.4% y-o-y in June 2018 (+4.3% y-o-y in May). POS transactions growth can be attributed to the rise in Restaurants and Hotels (+32.8% y-o-y) and Food and Beverage (+15.3% y-o-y) segments. Figure 4 Point-of-sale transactions (POS) trend Figure 5 ATM cash withdrawals trend SAR bn 25.0 40% SAR bn 80.0 50% 20.0 15.0 30% 20% 70.0 60.0 50.0 40% 30% 20% 10% 40.0 10% 10.0 0% 30.0 0% 5.0-10% 20.0 10.0-10% -20% - -20% - -30% POS YoY ATM Cash withdrawals YoY Disclosures Please refer to the important disclosures at the back of this report. 4
Figure 6 Points-of-sale transactions trend by sectors 100.00% YoY change 80.00% 60.00% 40.00% 20.00% 0.00% -20.00% -40.00% Transportation Rest. and Hotels Food & Beverages Cloth. and Footwear SAMA reserves witnessed a rise in June SAMA Foreign Exchange Reserves SAMA Foreign Exchange reserves witnessed a rise (+0.9% y-o-y) on an annual basis for the third straight month in June 2018 to stand at SAR 1,899bn (US$ 506.3bn). On a monthly basis, reserves increased, after a brief drop last month, by 0.4% in June (-0.4% m-o-m in May). Meanwhile, investment in foreign securities edged down 0.1% m-o-m in June versus the fall of 1.4% m-o-m in May, while foreign currency and deposits abroad climbed 1.4% m-om in June compared to the rise of 1.6% m-o-m in May. Figure 7 Reserves assets Figure 8 Major components of foreign assets 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 SAR bn 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Reserves Assets YoY (RHS) Foreign Currency & Deposits Abroad Investment in Foreign Assets Disclosures Please refer to the important disclosures at the back of this report. 5
Private sector credit fell sequentially in June Credit and deposit growth Banking sector credit to the private sector growth fell 0.1% m-o-m in June 2018 (+0.4% y-oy), compared to m-o-m in last month (+0.4% y-o-y). Meanwhile, for Q2 2018 the private sector credit rose by 0.2% y-o-y (+1.5% q-o-q). However, the Manufacturing & Processing, Building & Construction and Commerce sectors witnessed a fall (y-o-y basis) although at a slower pace in Q2 2018. Claims on the public sector jumped by 32.8% y-o-y (+0.35% m-o-m) in June 2018, as against the rise of 32.0% y-o-y (+3.7% m-o-m) in the previous month. However, deposits declined 1.2% y-o-y in June (+1.3% m-o-m). Business and Individual deposits, which accounted for ~72% of the total deposit base, increased 3.4% y-o-y ( m-o-m), whereas Government Entities deposits fell 18.2% y-o-y (+1.2% m-o-m). Figure 9 Credit and deposit growth Figure 10 Loans to Deposits YoY 2 15.0% 86.0% 84.0% 1 82.0% 5.0% 8 78.0% -5.0% 76.0% -1 74.0% Deposits Credit Loan to Deposit Ratio Figure 11 Y-o-Y growth/decline in credit by sector Figure 12 Banking sector exposure by economic activity YoY change 30% 100% 25% 90% 20% 15% 10% 5% 0% -5% 80% 70% 60% 50% 40% 59% 58% 59% 59% 59% 58% 59% 59% 61% -10% 30% 21% 21% 21% 22% 22% 23% 23% 23% 20% -15% -20% Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 20% 10% 0% 8% 8% 7% 7% 7% 7% 6% 7% 7% 13% 13% 13% 13% 12% 12% 12% 11% 12% Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Manufacturing & Processing Building and Construction Commerce Manufacturing & Processing Building and Construction Commerce Others Disclosures Please refer to the important disclosures at the back of this report. 6
M3 fell for the first time in June Money supply Broader money supply (M3) declined 0.8% y-o-y in June, to stand at SAR 1,804bn, as against the yearly rise of 0.6% in May. The fall in M3 can be attributed to the drop in M2 (-1.0% y-oy). On a monthly basis, the M3 gained 1.4% in June (-0.3% m-o-m in May). As per the weekly money supply data by SAMA, M3 may remain steady in July. Figure 13 Money supply growth (y-o-y) Figure 14 Deposits break-up 25.0% 2 15.0% 1 5.0% -5.0% -1-15.0% SAR bn 1,200 1,000 800 600 400 200 0 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% M1 M2 M3 Time and Saving Deposits (LHS) Time and Saving Deposits (y-o-y) Demand Deposits (LHS) Demand Deposits (y-o-y) Banking sector profits fell in June Banking Sector Banking sector profits declined, for the first time in five months, by 3.5% y-o-y in June 2018 (+7.3% y-o-y in May), to stand at SAR 3,158mn, while the cumulative profits for the year stood at SAR 24,060mn (+8.25% y-o-y). On a monthly basis, banking sector profits dropped 28.0% in June 2018 (+1.0% m-o-m in May). Figure 15 Non-performing loans (%) Figure 16 Net Profit for Banks 1.8 1.7 1.6 1.5 1.4 1.3 1.3 1.2 1.1 1.4 1.3 1.1 1.2 1.2 1.2 1.2 1.2 1.2 1.3 1.4 1.4 1.4 1.5 1.6 1.7 SAR mn 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1.0 1,000 500 - Nonperforming loans to total gross loans. Q2 data not released yet. Disclosures Please refer to the important disclosures at the back of this report. 7
Cost of living index rose on a monthly basis in June Inflation dynamics Cost of living index rose by 2.1% y-o-y in June as against the annual rise of 2.3% in May. The Housing, Water, Electricity, Gas sector (constituting ~25.4% of the index) dropped by 1.4% y-o-y (-0.4% y-o-y in May), while the Food & Beverage sector (accounting ~18.9% of the index) rose 5.7% y-o-y (+5.3% y-o-y in May). On a monthly basis, the cost of living index edged up 0.1% in June compared to -0.4% m-o-m in the previous month. Figure 17 Inflation trend (y-o-y) Figure 18 Inflation drivers (y-o-y) 5.0% 12.0% 4.0% 3.0% 2.0% 1.0% 3.0% 2.9% 2.8% 2.5% 2.3% 2.1% 1 8.0% 6.0% 4.0% 2.0% -1.0%-0.5% -0.8% -0.8% -0.8% -1.2% -1.1% -2.0% -1.7% -3.0% -2.0% -4.0% -6.0% General Index Food And Beverages Transport Furnishings, Household Housing, Water, Electricity, Gas Crude oil prices dropped on a MTD basis in July Crude oil dynamics Crude oil prices (Brent September futures contract) dropped 6.2% MTD in July 2018, as Libya resumed its oil exports from its eastern ports. Further, reports suggesting that the US is mulling to tap its Strategic Petroleum Reserve also weighed on the prices. Crude oil production increased 3.3% on a monthly basis, to 10.3mbpd in June 2018, compared to the rise of 0.7% m-o-m in May. On a yearly basis, the crude oil output rose 2.8% in June 2018 versus the rise of 0.4% in the previous month. Figure 19 Saudi crude oil production trend (mbpd) Figure 20 Crude oil prices trend (US$/bbl) 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% -8.0% 85 80 75 70 65 60 55 50 45 40 35 Source: Bloomberg, Al Rajhi Capital Saudi Crude oil production YoY growth Source: Bloomberg, Al Rajhi Capital Brent WTI Arab Light Disclosures Please refer to the important disclosures at the back of this report. 8
Non-oil exports increased in May Non-oil foreign trade Kingdom s non-oil exports continued to rise in May 2018, up by 14.3% y-o-y, compared to the annual rise of 26.5% in April. The rise can be primarily attributed to the rise in plastics & rubbers (+44.7% y-o-y), constituting 35.3% of the total exports, followed by chemical products (+10.5% y-o-y), accounting 29.2% of total exports. However, non-oil imports slipped 6.4% y-o-y in May 2018, as against the drop of 3.3% y-o-y in the previous month. The fall was largely due to the drop in imports of machinery & electrical (-1 y-o-y) constituting 22.2% of the total imports. Meanwhile, UAE was the top export destination and China was the largest import country in May 2018. Figure 21 Non-Oil Exports Commodities (SAR mn) Mar-18 Apr-18 May-18 % y-o-y % m-o-m Plastics & Rubbers 6,149 6,421 6,716 44.7% 4.6% Chemical Products 5,436 5,478 5,556 10.5% 1.4% Ordinary Metals 1,751 1,695 1,782 28.9% 5.1% Transport Equipments 904 1,357 1,117-12.1% -17.7% Others 3,708 4,605 3,862-10.9% -16.1% Total 17,948 19,556 19,033 14.3% -2.7% Figure 22 Non-Oil Imports Commodities (SAR mn) Mar-18 Apr-18 May-18 % y-o-y % m-o-m Machinery & Electricals 8,542 9,519 9,818-1 3.1% Transport Equipments 5,107 6,746 7,130 10.8% 5.7% Ordinary Metals 3,839 4,150 3,723-1 -10.3% Chemical Products 4,378 4,392 4,237 2.6% -3.5% Others 15,470 17,848 19,344-10.7% 8.4% Total 37,336 42,655 44,252-6.4% 3.7% Figure 23 Non-oil export trend (y-o-y) Figure 24 Non-oil import trend (y-o-y) YoY 7 6 5 4 28.0% 3 2 1 0.5% -1-2 -18.9% -3 5.8% -2.1% 18.2% 17.2% 18.0% 13.1% 35.8% 3.6% 26.5% 14.3% YoY 6 5 4 3 16.0% 2 1-4.0% -1-2 -15.5% -3-29.0% -4-9.8% 2.3% -2.6% -1.1% -3.3% -6.4% -1-13.2% -8.2% Non-oil Export Non-oil Import Disclosures Please refer to the important disclosures at the back of this report. 9
Figure 25 Impact of currencies on Weighted-average Saudi imports (m-o-m) * FX movement (USD/Unit) November December January February March April May EUR 2.2% 0.8% 3.4% -1.8% 1.1% -2.0% -3.2% YUAN 0.4% 1.4% 3.6% -0.7% 0.6% -0.7% -1.2% YEN 1.0% -0.1% 3.2% 2.3% 0.4% -2.8% 0.5% FX impact on weighted average imports Germany 0.1% 0.2% -0.1% 0.1% -0.1% -0.2% China 0.1% 0.3% 0.7% -0.1% 0.1% -0.1% -0.2% Japan NA NA NA NA NA NA NA Source: Bloomberg, GASTAT, Al Rajhi Capital * Out of the 5 top-ranked countries of import, currency of UAE is pegged and so would its variance with the USD and therefore it has been ignored. USD itself is the currency of comparison and so US has also not been taken. Currency movement of Germany, China and Japan has been taken up for analysis. For calculation of weights of the countries of import, data from May has been chosen and assumed constant for preceding period, as consistent data sets is not available for all the countries chosen for analysis. For May 2018, the weights are China (18.6%), Germany (5.4%) and Japan (NA). Data for Japan not given in May. Saudi International bond yields fell on a MTD basis in July Saudi international bond yields Saudi international bond yields with 5 year maturity fell by 4.0bps MTD to 3.511% in July 2018, while bond yields with 10 and 30 year maturities dropped by 7.6bps and 17.6bps, respectively to 4.007% and 4.802%. Figure 26 International Bond Yields 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 30 Yr 10 Yr 5 Yr Source: Bloomberg, Al Rajhi Capital Major currencies fell on a MTD basis against the USD in July Exchange Rates On the forex front, except Canadian Dollar most major currencies (Chinese Yuan, British Pound, Euro, Australian Dollar and the Japanese Yen) fell on a MTD basis as against the US Dollar in July 2018. Disclosures Please refer to the important disclosures at the back of this report. 10
Figure 27 Monthly Change (%) against the US Dollar 1.0% 0.5% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% Canada Australia Europe Japan UK China Monthly Change (%) against USD Source: Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 11
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