Post on 27-Apr-2018
Contents
Executive Summary 1
2016 and 2017 Projections 2
1. Global Economic Developments 3
2. Saudi Economic Develpments and Outlook 7
2.1 Real Sector 7
2.2 Fiscal and External Balances 10
2.3 Monetary Developments 12
2.4 Financial Sector 14
2.5 Risks 15
Said A. Al ShaikhHead of Economics
s.alshaikh@alahli.com
Authors:
Tamer El ZayatSenior Economist/Editor
t.zayat@alahli.com
Majed A. Al-GhalibSenior Economist
m.alghalib@alahli.com
Yasser A. Al-DawoodEconomist
y.aldawood@alahli.com Sources: SAMA and NCB
A New Era of Fiscal Consolidation and Reform
• Piercingthrough2016,theworld’smacroeconomiclandscapehasn’tshifteddrastical-ly from 2015 as many of the same perils still persist. The slowdown in emerging and developingeconomies,whichstillaccountsforover70%ofglobalgrowthmeasuredbypurchasing-powerparity,ismarkingitsfifthconsecutiveyear,contrastingwithamodestrecoveryinadvancedeconomies.InApril,theIMF’sWorldEconomicOutlook(WEO)toneddownitsforecastsfor2016and2017’sglobaloutputonthebackofaslowdowninmanufacturing,investmentandweakcommodityprices.Therefore,thepaceofgrowthwillbemoregradualat3.2%and3.5%,respectively.
• SuppressedoilpriceswillweakentheeconomicoutlookforSaudiin2016,whichwillgrowby1.7%,thelowestsince2009.WebelievethattheoilsectorGDPwilldeceler-atesignificantlyto0.3%thisyearbasedonslowergrowthinSaudicrudeproduction.Additionally,thenon-oilsectorGDPisexpectedtomoderatefurtherthisyeartobe-low3%astheeconomicslowdownweighsonbusinessesandconsumerconfidencealike.Thesectorwillcontinuetobeimpactedbythenegativespillovereffectsfromcollapsingoilrevenues,therecentreductionsinsubsidiesandthefadingimpactfromtheseriesofroyaldecreesannouncedinJanuaryandApril2015.
• Elevated production levels, decelerating demand, and record high inventorieswillsuppressoilprices.SupplyfactorspertainingtoOPECanddemanddynamicspertain-ing toemergingmarkets, inparticularChina,haveunderpinnedthisbearishview.Recently,thefailuretoreachanagreementtofreezeoilproductioninAprilhasmadeithighlylikelythatoilwillremaininarange-boundterritory,endingtheyearbelowlastyear’s levels.Accordingtoourbaselinescenariofor2016,weassumeArabianLightpricestoaverageUSD45/bblandSaudiproductiontoremainat10.2MMBD,withgovernmentannouncementsunderscoringadamancytoprotectmarketshareat any cost.
• Themoneycreationcycleisgrindingtoahalt,withtheinfluxofrecentyearsdissipat-ingasoilrevenuesplungesharplyand,inturn,governmentspendingdeclineinthedouble-digit.In2016year-to-date,withprivatecreditgrowthoutpacingdeposits,theLoans-to-Deposits(L/D)ratioreached88.7%bytheendofApril,promptingSAMAtoraisetheguidancelimitto90%from85%.RisingL/Dratiocoupledwiththein-creasedissuancesofsovereignbondshavestressedliquiditylevels,asevidentfromthe continued rise in interbank rates.Wedoexpect furtherdeceleration inbroadmoneythroughoutthisyear.
• Thefeebleglobaleconomicoutlookandthelackof inflationarypressuresaresup-porting the tendency of central banks to maintain/intensify monetary accommoda-tion.After aDecemberhike, the Fed reversed to await-and-see approachas theextrememarketvolatilityatthebeginningof2016riskednegativespillovereffectsonUSmarkets. InJapanandEurope,aggressivemonetaryeasing isproceedingtobattle the stubbornly low inflation.On theemergingmarkets front, centralbanksaregrapplingwithslowergrowth,weakcurrenciesandcapitaloutflows,whichhavecomplicatedmonetarypolicy.Lookingahead,downsiderisksstemmingfromtheChi-neseeconomicslowdown,thecontainedcommodityoutlook,andaresilientUSDwillremain headwinds for global growth.
Business Cycles in KSA
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2011 2012 2013 2014 2015P 2016F
Y/Y Growth in Non-oil Sector, Contribution Real GDP Growth Rate Y/Y Growth in Oil Sector, Contribution
2
Real Sector
WeightedAverageKSACrudeSpotPrice,ArabLight,USD/BBL 110.2 106.4 97.2 50.2 45.0 55.0 32.3 4M16
AverageDailyCrudeOilProduction,MMBD 9.8 9.6 9.7 10.2 10.2 10.3 10.2 4M16
GDPatCurrentMarketPrices,SARbillion 2,752.3 2,791.3 2,826.9 2,449.6 2,322.3 2,488.9 - -
GDPatCurrentMarketPrices,USDbillion 734.9 745.3 754.8 654.1 620.1 664.6 - -
RealGDPGrowthRate 5.4% 2.7% 3.6% 3.4% 1.7% 2.4% - -
OilSectorGDPGrowthRate 5.1% -1.6% 2.1% 3.1% 0.3% 1.3% - -
Non-oilSectorGDPGrowthRate 5.5% 6.4% 4.8% 3.6% 2.9% 3.2% - -
Population,million 29.2 30.0 30.8 31.4 32.0 32.7 - -
PopulationGrowthRate 2.9% 2.7% 2.6% 2.0% 2.0% 2.0% - -
GDP/Capita,USD 25,172.6 24,849.1 25,172.6 20,840.4 19,370.3 20,353.0 - -
CPIInflation,Y/Y%Change,Average 2.9% 3.5% 2.7% 2.2% 4.5% 5.0% 4.2% Apr-16
External Sector
MerchandiseTradeBalance,USDbillion 246.6 222.6 184.0 62.7 50.6 73.8 - -
OilExports,USDbillion 337.5 321.6 284.2 157.6 137.5 168.3 - -
Non-oilExports,USDbillion 50.9 54.1 57.9 47.0 41.1 47.5 - -
MerchandiseImports,USDbillion (140.7) (152.1) (158.5) (141.8) (128.1) (142.0) - -
InvisiblesTradeBalance,USDbillion (81.8) (87.1) (106.9) (104.1) (103.3) (109.1) - -
NetFactorIncome,USDbillion 9.2 11.7 13.8 7.4 7.5 8.5 - -
NetUnilateralTransfers,USDbillion (28.7) (34.0) (36.0) (38.6) (41.3) (42.1) - -
CurrentAccountBalance,USDbillion 164.8 135.4 76.9 (41.3) (52.7) (35.3) - -
CurrentAccountBalance/GDP 22.4% 18.2% 10.2% -6.3% -8.5% -5.3% - -
NetForeignAssetswithSAMA,USDbillion 648.5 717.7 725.2 609.7 539.0 515.7 573.0 Apr-16
Fiscal Sector (Central Government)
BudgetedExpenditure,SARbillion 690.0 820.0 855.0 860.0 840.0 856.8 - -
ActualRevenues,SARbillion 1247.4 1156.4 1044.4 608.0 586.3 798.3 - -
ActualExpenditure,SARbillion 873.3 976.0 1140.0 975.0 897.0 923.9 - -
ExpenditureOverrun,% 26.6% 19.0% 33.3% 13.4% 6.8% 7.8% -
TotalRevenues/GDP 37.5% 44.5% 45.3% 41.2% 37.1% 32.9% - -
TotalExpenditure/GDP 31.7% 35.0% 40.3% 39.8% 38.6% 37.1% - -
OverallBudgetBalance,SARbillion 374.1 180.3 -95.6 -367.0 -310.7 -125.6 - -
BudgetBalance/GDP 13.6% 6.5% -3.4% -15.0% -13.4% -5.0% - -
Break-EvenOilPrice 73.9 82.6 103.6 79.2 69.2 67.1 - -
Financial Sector
USD/SARExchangeRate 3.75 3.75 3.75 3.75 3.75 3.75 3.75 Apr-16
GrowthinBroadMoney(M3) 13.9% 10.9% 11.9% 2.6% 2.5% 5.3% -1.5% Apr-16
GrowthinCredittothePrivateSector 16.4% 12.1% 11.9% 9.8% 5.3% 6.3% 10.4% Apr-16
Average3MSARDepositRate 0.9% 1.0% 0.9% 0.9% 2.5% 3.0% 1.8% 4M16
Average3MUSDDepositRate 0.4% 0.3% 0.2% 0.3% 0.9% 1.5% 0.6% 4M16
Spread,inBasisPoints,SAIBOR-LIBOR 55.2 68.7 70.4 56.4 160.0 150.0 113.8 4M16
2016 and 2017 Projections
Ourmacroeconomicprojectionsarebasedonanaveragecrudeoilprice(ArabianLight)ofUSD45/bblandanaveragedailycrudeoilproductionlevelof10.2MMBD(outofwhich72%isexported)in2016.Thedecreaseinoilrevenueswillcontinuetoweighnegativelyonthefiscalandcurrentaccountsthatwillregisterdeficitsof13.4%and8.5%toGDP,respectively.RealGDPgrowthisexpectedtorisebyjust1.7%,thelowestsince2009,mainlyduetoadecelerationingrowthinboththeoilandnon-oilsectorsthatwillrespectivelyexpandby0.3%and2.9%,lowerthanlastyear’s3.1%and3.6%.Moderationwillbeacrosssectors,withkeysectorssuchastrade,constructionandmanufacturing,grow-ingat3%,3%and2.5%,respectively,drivenbythedecline ingovernmentcapitalspendingandreducedbusinesssentiment.Ostensibly,thedrivetowardsfiscaladjustmentandconsolidationwillcontinueunabatedlyoverthenextfiveyears,whichwillsupporteconomicdiversificationandsustainability.Fiscaldeficitswillweighnegativelyonnetforeignassetsgoingforward,asituationthathasmaterializedwiththegovernmentdrawingdownaroundUSD140billionsince2015.Chinesegrowthprospects,G3monetarypolicydivergence,andlackofcomplianceamongOPECmembersarethemostnotableeventsthatcanposeriskstoourcrudeoilpricesandproductionforecastswhethertotheupsideordownside given the inherent volatility of oil markets.
Sources: Reuters, SAMA and NCB
Note: Saudi Economic Perspectives Data (May 2016)
Key Macroeconomic Indicators 2012 2013 2014 2015P 2016F 2017F Latest Date
NCB PERSPECTIVES | JUNE 2016
3
1. Global Economic Developments
Piercing through 2016, the world’s macroeconomic landscape hasn’t shifted drastically from 2015 as many of the same perils still persist. Theslowdowninemerginganddevelopingeconomies,whichstillaccountsforover70%ofglobalgrowthmeasuredbypurchasing-powerparity,ismarkingitsfifthconsecutiveyear,contrastingwithamodestrecoveryinadvancedeconomies.InApril,theIMF’sWorldEconomicOutlook(WEO)toneddownitsforecastsfor2016and2017’sglobaloutputonthebackofaslowdowninmanufacturing,investment,andweakcommodityprices.Therefore,thepaceofgrowthwillbemoregradualthanpreviouslyprojectedatanannualized3.2%and3.5%,respectively.Mostofthisgrowthislikelyattributedtotheproactiveunconventionalmonetarypoliciesundertakenbytheworld’smajorcentralbanks,includingtheexperimentationofnegativeinterestrates.Inflationratesinadvancedecono-miesarebelowcentralbanks’targets,thusmonetaryaccommodationremainsessential.Inaddition,higherdisposableincomeresultingfromcheaperenergypriceswillboostretailandserviceorientedeconomies.Fiscalreformsaretakingabackstagewithgeopoliticaltensionsontherise;however,somecountrieslikeSpain,India,andtheGCCarebettingonboldfiscaladjustmentstoplugbudgetdeficits.Currencydepreciationsandcapitalrepatriationareleavingadismaloutlookonemergingmarketswhileamorestablerecoveryinadvancedeconomieswillcontinue,albeitatagradualpace.Hence,weexpectadvancedeconomiestobethelocomotiveforgrowthin2016-2017.Nevertheless,downwardriskstotheglobaloutlookareduetospilloverfrominternationaltrade.TheChineseeconomicslowdown,thecontainedcommodityoutlook,andaresilientUSDwillremainheadwindsforglobalgrowth. Commodities continue to unwind since the end of the commodity super-cycle in 2011. According to the Re-uters/JeffriesCRBindex,commoditymarketscollectivelyfell42.3%between2011-2015,andin1Q2016,theyslidanadditional2.7%,indicatingnoinflectionpoint.Thecommoditybubbleburstwastoosteepforcommodityexportingcountriestoabsorb,leadingtomajoreconomicperilsincountriessuchasBrazil,Chile,Australia,Nigeria,andRussia.Oneofthelargestdeclineswasincrudeoil,fallingfromUSD129.9/bblinearlyMarch2012tojustUSD25.8/bblbylateJanuary2016(seebox1).Elevatedstocksandlowerindustrialdemandforecastsledinvestorstoshyawayfrombaseandpreciousmetals,whileamplesupplyofagriculturalcommoditiesledtodouble-digitdeclinesinprices.Furthermore,theGoldman-SachsAgriculturalCommodityIndextumbled34.7%between2011-2015,reflectingthedrasticmarketcorrection,whichresultedfromover-investmentduringthecommoditymarketboom.TheUSdollar’sstrengtheningsincelate2014,resultingfromtheFed’snormalizationrhetoricmovingawayfromdovishness,exacerbatedthecom-modityslump.Thetrade-weightedUSdollarindexsurpassedthe100markonMarch2015andremainedrange-boundatmid-90s.SuchelevatedlevelsfortheUSDhadprofoundimplicationsoncommoditiesandotherUSDdenominatedassets.Lookingforwardin2016,commoditypriceindiceswillremaincontainedduetopersistentlyhighsupplyandweakgrowthprospectsinemergingmarkets.Mostimportantly,China’snewgrowthmodelwhichtransitionsawayfrominvestment-ledgrowthwillremainahangingcloudoncommodities,therefore,wedonotexpectafullreboundtothe2010-2011 levels.
Sources: IMF Sources: Thomson Reuters
2. Selected Commodity Price Indices(S&P Goldman Sachs Spot Indices; January 100 = 2004)
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Agriculture Industrial Metals Precious Metals Petroleum Advanced economies Emerging and developing economies World
1. Global GDP Growth(Annual % change)
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Advanced economies Emerging and developing economies World
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Benchmark treasury yields are expected to remain compressed due to growing major central banks bond-buying programs.Demandforriskier,higheryieldingholdingsretractedasglobalstocksslidsharplyearlyin2016.Weakinflationaryprospectsamidaggressivemonetarystimulus,inadditiontoweakcommoditymarketshadinvestorsflockingtowardsthesafetyofbonds.Japan’slongbattlewithdeflationledpolicymakerstotheunchartedterritoriesofnegativeinterestrates,pushing10-yearJapaneseGovernmentBonds(JGBs)yieldstonegative0.09%bytheendofthefirstquarter.Incomparisontothebeginningoftheyear,theyieldonbenchmarkJGBsslid132%.Inthebrutalracetothebottom,the10-yearGermanbundyieldtumbled77.8%in1Q2016andispoisedtofallfurtherastheECB’sinitia-tivesgainstraction.Yieldon10-yearUStreasurieslost20.6%in1Q2016,andthecontinuedaccommodativestanceattheFedwilllikelykeepyieldsfairlylowintheshort-run.
The feeble global economic outlook and the lack of inflationary pressures are supporting the tendency of central banks to maintain/intensify monetary accommodation. The US Federal Reserve ended the zero-rate era in December2015byhikingitsfedfundsrateby25pbsallowingforatargetrangebetween0.25%and0.5%.However,theFedreversedtoawait-and-seeapproachastheextrememarketvolatilityatthebeginningof2016riskednegativespillovereffectsonUSmarkets.InJapanandEurope,aggressivemonetaryeasingisproceedingtobattlethestubbornlylowinflation.TheBankofJapanhadasurpriseratecuttonegative0.1%inJanuary,andpledgedtoincreaseitsmon-etarybasebyJPY80trillionannually.Additionally,theECBadoptedrecordlowzerointerestrate,massiveEUR80billion/monthassetbuyingprogramandnegativedepositrates.Nevertheless,consumerpriceshardlybudgedandareexpectedtoremainstickythroughout2016.Intheneartomedium-term,wedonotseeinflationineithertheEurozonenorinJapanreachingtheir2%inflationtargetduetolackofsufficienteconomicdrivers.Indigenousvariablessuchaswagegrowtharetooslowtowarrantmeaningfulupwardpressure,andexogenousvariablessuchasweaktrade,andlowglobalcommodityandenergypricesareweighingontheinflationaryspecter.
Ontheemergingmarketsfront,centralbanksaregrapplingwithslowergrowth,weakcurrencies,andcapitaloutflowswhichhavecomplicatedmonetarypolicy.Growthforecastsforemerginganddevelopingmarketsin2016and2017weremarkeddownintheIMF’smostrecentupdateby0.2%respectivelyto4.1%and4.6%.Geopoliticaluncertaintyandhighlyvolatileoilmarketsposehugeriskstotheforecast.Forinstance,thefalloutofthePetrobrasscandalinBrazil,andRussia’sadjustmentto lowoilpricesandWesternsanctionswillprolongtherecessionaryperformance intheseeconomies.Brazilisexpectedtoshrinkby3.8%in2016andremainstagnantin2017,whileRussia’sgrowthwillpostanotherrecessionat1.8%in2016.
China,theworld’ssecond-largesteconomy,havingtheweakesteconomicperformancesince1990,withitsgrowthfall-ingbelow7%for2015and2016despitethemyriadattemptstoreduceinterestratesandreserverequirements,anddevaluetheYuantospurbusinessactivity.China’sNationalPeople’sCongress(NPC)setaGDPgrowthratetargetof
Sources: IIF Sources: Thomson Reuters
3.Emerging Market Economies: Capital Inflows
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Nonbanks, Net Commercial Banks, Net
Portfolio Investment, NetDirect Investment, Net
USD Billion4. Global Equity Markets(January 2008 = 100)
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World Emerging Markets G7
NCB PERSPECTIVES | JUNE 2016
5
6.5%-7%for2016,thefirsttimethegrowthtargetissetasarange,indicatingashiftinstrategiestobuildingreaterflexibility,whilecontinuingwiththeemphasisonGDPgrowth.Weforeseefurtherinterestratecuts,likelycoupledwithunconventionalQE-likemeasures.The2016’sbudgetmarksanexpansionofChina’sfiscalpolicy,withanincreaseinthebudgetedfiscaldeficitto3.0%ofGDP,from2.3%in2015and1.87%in2014.TheincreaseaddsRMB560billion(USD86billion)tothe2016budgetedfiscaldeficit;thispointstostrongerfiscalstimulusthisyear.
Sources: Thomson Reuters Sources: IMF
The age of deflation reigns on advanced economies in the lack of adequate price pressures. The aftermath of thegreatrecessionlefttheglobaleconomywithaworseningjobsmarket,andtherecoveryafterwardshasbeenfragileandslow.Lendinginstitutionshavebeenmoreconservative,andborrowerslargelyturnedtosavers.Banks’reluctanceto lendexplainsmostof thedilemmaof low inflationdespitehelicoptermoneydropsandmassive scalemonetarystimuli.Globalconsumerpricesareexpectedtostaylowinthemedium-termasriskaversionremainsnotablyhigh.TheEuropeanCommissionforecastsitsharmonizedinflationindextogrowby0.5%in2016,assumingenergypricesfindnosuddeninflectionpoint.IntheUS,theinflationaryspecterislessdismalalbeitnotcompletelyoutofthewoodswithcorePCEindexexpectedtoriseby1.3%.Japan’sinflation,assumingtheefficacyofrecentpoliciescouldreversefrom-0.2%in2016topossiblyreach1.2%in2017.Incontrast,emerginganddevelopingmarketshavebeenthesubjectofinflationarypressuresresultingfromcurrencydevaluationsinattemptstojumpstarteconomicactivity.Russia,afterrecordingawhopping15.8%inflationratein2015isexpectedtopost8.4%in2016onthebackofamorestablecur-rencyprospect.TheIMFforecastsBrazil’sinflationratetohoveraround8.7%in2016andTurkey’sat9.8%.
6. Fiscal Deficits(in % of GDP)
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Box1:Oil…Bottoming-outin2016 Elevatedproductionlevels,deceleratingdemand,andrecordhighinventorieswillsuppressoilpricestoanaverageofUSD45/bblin2016,accordingtoourestimatesfortheArabianlight.SupplyfactorspertainingtoOPECanddemanddynamicspertainingtoemergingmarkets,inparticularChina,haveunderpinnedthisbearishview.Eventhoughmajorcentralbankshaveceasedtobeahangingcloudonglobalmarkets,withmoststressingtheircontinuedsupportofaccommodativemonetarypolicies, theupside impacton commodities thatusually ensueafterdecisions toexpandquantitativeeasingandtodelayinterestratehikesdidnotfullymaterializeasitdidin2009and2010. ThelackofcomplianceamongOPECmembersthatproducedabovethe30MMBDquotaforthe24thmonthinarowwillbeanimportantdrag,especiallythatthegrouplacksaunifiedfront.Saudi,IraqandIranareadamantinproduc-ingasmuchastheycan.TheKingdom’sproductioncontinuesnearrecordhighs,averaging10.2MMBDyear-to-date,whileIraqhasincreasedoutputsince2015byaround0.8MMBD,reaching4.2MMBDinMarch.Additionally,liftingthesanctionsimposedinJuly2012onIranisexpectedtobringanadditional0.5-1MMBDduringthisyear,whichwillkeepOPEC’sproductionabovethe32MMBDmark.
Eventhoughnon-OPECmembersandhigh-costproducerswillcontinuetobepressuredthisyear,theanticipatedde-clineintheirproductionwillnotoffsetOPEC’soverquotastrategy.TheIEA,EIAandOPEChaveforecastedadeclineinnon-OPECsupplybetween400-750thousandbarrelsaday,thefirstannualdecreasesince2008,largelyduetothesteeperdeclineinUSshaleproduction.TheEIApredictedinitslatestreportthatcompaniesoperatinginUSshalefor-mationswillreduceproductionforthefirsttimeinsixyears,whichunderscoresthechallengingenvironmentevenafterslashingcapitalspending,layingoffworkersandfocusingonthemostproductiveareas.
Onthedemandside,Chinaisexpectedtohavetheweakesteconomicperformancesince1990,withgrowthfallingbelow7%for2015and2016despitethemyriadattemptstoreduceinterestratesandreserverequirements,andde-valuetheYuaninordertospurbusinessactivity.Furthermore,emergingmarketsareexpectedtoexpandat4%,theslowestpacesince2010andwellbelowtheirten-yearaverageof7%.Generally,thethreeeminentorganizationsareforecastingoildemandtorisebetween1.1-1.25MMBDin2016,muchslowerthanlastyearthatsawdemandgrowbymorethan1.5MMBD,afive-yearhigh.
TherecordUSandglobalcrudeoilinventorieswillalsocontinuetoweighonoilmarkets.TheearlyAprilUScrudeoilinventorythatstoodat529.9MMbblsis37%morethanthelevelrecordedin2014,whichwas388MMbbls,andisalsoatan80-yearhighforthistimeofyear.Additionally,OECD’scommercialtotaloilinventoriesrosetoaround3.023billionbarrels,neararecordlevelthatisequivalentto65.3daysofconsumptionandabovethefive-yearaverage.Giventheseaforementioneddynamics,andmostrecentlythefailuretofreezeproductioninDoha,wedonotexpectthemarkettobalancein2016,withoilbeingcontainedwithinaUSD30-50/bblrange.
Sources: EIA Sources: EIA
Crude Oil Price Developments
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NCB PERSPECTIVES | JUNE 2016
7
Sources: SAMA and NCB Sources: OPEC and NCB
2. Saudi Economic Developments and Outlook
2.1 Real Sector
Suppressed oil prices will weaken the economic outlook for Saudi in 2016, which will grow by 1.7%, the low-est since 2009.Lastyear,amoderatebusinesscycletookhold,weighingonnon-oileconomicactivitiesthatgrewby3.6%comparedto4.8%in2014.Thisdecelerationwasdrivenbylesseroilrevenuestricklingdownintotheeconomy,especiallyasthegovernmenthadtoreducespendingtominimizethebudgetdeficit.Nevertheless,realGDPgrowthat3.4%wassupportedbytheoilsector,whichexpandedbyasubstantial3.1%,onthebackofrecordproductionlevelsabove10MMBDastheKingdomutilizeditsexcesscapacitytomaintainmarketshareamidstrisingnon-OPECoilproduction,namelyUSshale.Innominalterms,thesharpdeclineinArabianlightaveragespotpricetoUSD50.2/bbl,48.3%below2014’saverage,resultedinasignificantcontractioninnominalGDPby13.3%,thefirstcontractionsince2009.Goingforward,itishighlylikelythatoilwillremaininarange-boundterritory,endingtheyearbelowlastyear’slevels,whichwillundermineeconomicgrowthforthisyear.Therefore,webelievethattheoilsectorwilldeceleratesignificantlyto0.3%thisyearbasedonslowergrowthinSaudicrudeproduction.Incontrast,realnon-oilGDPsectorisexpectedtomoderateto2.9%thisyear,yetasgovernmentreformsunravel,thesectorwillbetheprimaryforcetomaintain the economy on an expansive trend.
Even though the anticipated National Transformation Plan (NTP) will aim to diversify the economy away from oil, the oil story still remains pivotal and valid.In2015,oilcontributed42.7%torealGDPandrepresented73.1%oftotalfiscalrevenues.Despitebottoming-outinFebruary,downsiderisksonoilpricesremainentrenchedduetorecordinventorylevels,technologicaladvancementsinshalefrackingandsluggishglobaldemandgrowth.Addition-ally,lowercomplianceamongOPECmembersimpliesthatexcesssupplywillcontinuethroughoutthisyear,andassuchwedonotforeseeSaudicuttingitsrecordoilproductionlevelsanytimesoon,neitherunilaterallyorcollectively.Interest-ingly,recentgovernmentannouncementsunderscoredadamancytoprotectmarketshareatanycost,withthepos-sibilityofincreasingoutputto11.5MMBD,yetitisouropinionthatsuchscenariowillnotmaterialize.Accordingtoourbaselinescenariofor2016,weassumeoilpricestoaverageUSD45/bblandSaudiproductiontoremainat10.2MMBD,andinturnoilrevenuesareexpectedtodeclinetoSAR386.3billion,13.1%lowerthan2015.Onamedium-termnote,prolongedlowoilpriceswillforcehighcostoilproducerstocurtailcapitalspending,reduceinvestments,andinturnreducesupply,thus,puttingupwardpressureonpricesasinventorylevelsgraduallyreturntonormallevels.
7. Real GDP Growth, Contribution
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Non-oil Private Non-oil Public Oil Real GDP
8. Saudi Crude Oil Production
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MMBD
8
The non-oil sector is expected to moderate further this year to below 3%, as the economic slowdown weighs on businesses and consumer confidence alike.Thesectorwillcontinuetobeimpactedbythenegativespillovereffectsfromcollapsingoilrevenuesandtherecentreductionsinsubsidies.Therationalizationofgovernmentspending,theonlychanneltoconvertthecountry’soilwealthintoeconomicdevelopment,hasaffectedtheoutlookforbusinesssentiment,evidentfromourforwardlookingNCBBusinessOptimismIndex(BOI),wherebythenon-hydro-carbonsectorcompositeindexfor2Q2016postedthesixthquarterlydeclinetosettleat21points,whichisalsothesecondlowestlevelsincetheinceptionoftheindexin2009.Additionally,consumeractivity,gaugedbycashwithdraw-alsandPointOfSale(POS)transactionshadbeenindicativeofalessbuoyantoutlook.DuringthemonthofFebruary,cashwithdrawalsdeclinedby13.3%Y/Y,whilePOStransactionvaluesretreatedby9.0%annually,thelargestdeclinesinceJune2009.Wedobelievethatlowerdisposableincomefromthehikesinenergyandwaterpricesinadditiontothenegativewealtheffectsfromtheback-to-backannualdeclinesinTadawulwillweakenconsumptionexpenditure,especiallyonbig-ticketitems.Theone-timetwo-monthsalarytoallSaudipublicsectorworkersthatwasgrantedinearlylastyearalreadyceasedtostimulatespending.Accordingly,weexpecttheretailsectortodecelerateto3.0%thisyear,downfrom3.9%in2015.
Inanattempttocontrolspending,theMinistryofFinance(MOF)hasstoppedawardingcontractssince4Q2015,whichhasaffectedtheconstructionsector.Theconstructionmarketwillseekagreaterrelianceonprivatesectorinitiativestosupportadecliningprojectsmarket.Consequently,weexpectthevalueofawardedconstructioncontractstofallsignificantlybelowtheSAR200billion,theweakestlevelsince2010.Theoil&gassectorisexpectedtocontinuereceiv-ingthemajorityofconstructioncontracts,underpinnedbySaudiAramco’sannouncementofsustaininginvestmentsdespitelowoilprices.Theoilsectorsecured36.6%oftotalcontractsin2015,accordingtoNCB’sConstructionContractAwardsIndex.Despitetherecentmoderation,thefactthatcontractsawardedamountedtoaroundSAR1.6trilliondur-ingtheperiod2008-2015,willcontinuetoprovidesupporttothesectorvia“momentumspending”,resultinginanexpected3.0%expansionin2016.
The government is adamant on adopting structural reforms to attract capital inflows across different sec-tors, which had been highly concentrated around oil & gas.Intheretailsector,forinstance,thegovernmentwillallowfullforeignownershipofbusinesseswithoutalocalsponsor,whichisexpectedtoencourageinvestmentsandincreasetheappealoftheSaudimarket.ArecentannouncementofaUSgreen-cardlikeprogramwillprovidethehighlyskilledandforeignentrepreneurstheabilitytoapplyforresidencythatwillenablethemtoownrealestateandsetupbusinesses,which inouropinion,mightalso reduceremittancesover themedium-term.The2015/16GlobalCom-petitivenessReportpreparedbytheWorldEconomicForumrankedSaudiArabiaat25outof140countries,aheadofChina,Spain,IndonesiaandTurkey.Additionally,accordingtotheWorldInvestmentReport2015,issuedbytheUnitedNationsConferenceonTradeandDevelopment, theKingdomwas the third-largest ForeignDirect Investment (FDI)recipientinWestAsia,withreceiptstotalingUSD8.0billionin2014,9.6%lowerthan2013,surpassedbyTurkeyandtheUAEthatpostedUSD12.1billionandUSD10.1billion,respectively.EventhoughFDIhadbeenonadownwardtrendsince2008,wedobelievethatFDIlevelswillbesupportedagainaboveUSD10billionmarkbythegovernment’sinitia-tivestoattractinternationalinvestments,asevidentbyrecentbilateralagreementssuchastheSaudi-Koreanagreementtodevelop100’000housingunitsoversevenyearswithavalueofUSD10billion.
Sources: SAMA and NCB Sources: SAMA and NCB
9. Non-oil GDP Growth, Contribution
0%
2%
4%
6%
8%
10%
2011 2012 2013 2014 2015P 2016F
Manufacturing
Construction
Transport and Communication
Other Sectors
Electricity & Water
Trade, Hotels, and Restaurants
Financial, Insurance, and Real Estate Services
10. Real GDP Growth by Expenditure, Contribution
-5%
5%
0%
15%
10%
2011 2012 2013 2014
Net Exports
Gross Fixed Capital Formation
Government Final Consumption Expenditure
Change in Inventory
Private Final Consumption Expenditure Real GDP
NCB PERSPECTIVES | JUNE 2016
9
We believe that inflation will edge higher to average 4.5% for 2016 with domestic inflationary pressures off-setting the positive international dynamics of a resilient USD and contained global commodity prices. GiventhepegoftheSaudiRiyaltotheUSDollar,thestrengthofthelatterduringthelasttwoyearshadreducedimportedinflationondomesticprices.Thetradeweighteddollar index,whichtracks theUSDagainstcurrenciesofsixmajortradingpartners,ended2015at98.6whileaveraging96.3throughoutthisyear,16.4%higherthan2014’saverageof82.7.Additionally,theReuters/JefferiesCRBindex,aglobalcommoditiesgauge,droppedbyasubstantial23.4%lastyear.Thiscontributedtothecontinueddecelerationinthelargestcomponentofdomesticinflation,foodandbever-ages,whichrecordedanaverageriseofjust1.7%for2015,thethirdconsecutiveannualslowdown.Thesecondlargestcategory,housingandutilities,remainedstableforthefourthyear,postinganaverageof3.4%for2015.Therecentapprovalof“whiteland”tariffsisexpectedtocontainanyupsidepotentialforrealestatepricesbyencouraginglanddevelopment,thus,mitigatingthehousingshortage.However,giventherecentreductioninenergysubsidies,whichincludedhigherpricingforelectricityandwaterconsumption,thecategoryofhousingandutilitieswillriseconsiderablyabove8%Y/Yin2016.Inaddition,thetransportsub-indexwillincreasebyaround13%followingthe33%and50%increasein95and90octanegasoline,respectively.
Box 2: SCIs: Moderation in the Offing
2016’sgovernmentbudgetallocations tospecializedcredit institutions (SCIs)havemoderatedsignificantly,yet theircontinuationreflectsadamancytosupporttheeconomy.Accordingtothebudgetannouncement,SAR49.9billionwillbeallocatedtoSCIs,namelytheSaudi IndustrialDevelopmentfund(SIDF),SaudiCredit&SavingBank(SCSB),andtheRealEstateDevelopmentFund(REDF).AccordingtothelatestavailabledatapublishedbySAMA,theconsolidatedbalancesheetforSCIspointsto:(1)asignificantincreaseinthedisbursementsofnewloansbySAR40.8billionduring2015,a13.1%Y/Ygrowthrate,(2)anincreaseinthetotalvalueofinvestmentstoaroundSAR163.6billionbytheendof2015,whichwasattributedtoagrowingdomesticportfoliothatrosefromSAR115.9billionbytheendof2014toSAR149.4in2015,(3)aninsignificantincreaseinforeigninvestmentsthatremainedaroundSAR14billionmark,and(4)asizabledeclineindepositswithSAMAbyaround47%Y/YtoSAR36.7billion,reflectingthewithdrawalofsuchdepositsinordertoextendloanstolocalcompanies.TheselatestdatareflectthecentralroleplayedbySCIsasacatalystin the domestic economy.
Asexpected,theREDFwaslargestamongtheseinstitutionsintermsoftheoutstandingloansthatregisteredSAR145.9billion,anditisourbelievethatsuchfigurewillcrosstheSAR150billionthresholdinthecomingdatareleases.ItisnosurprisethatREDFwillmaintainitsstatusasthelargestlenderamongSCIswiththegovernmenttryingtomitigatethehousingmarketimbalancesespeciallyatthedemandside.ThePublicInvestmentFundandSCSBhadalsomaintainedthesecondandthirdrankgiventheirparticipationinprojectfinanceacrossdifferentsectorsthatenhancethekingdom’sabsorptivecapacity,withtheoutstandingloansofbothstandingatSAR103.9billionandSAR41.9billion,respectively.OntheSmallandMediumscaleEnterprises(SMEs)front,theLoanGuaranteeProgram“Kafalah”,whichisattributedtoacollaborationbetweentheMinistryofFinancerepresentedbySIDFandSaudibankscontinuedtogainground,
Sources: SAMA Sources: Thomson Reuters
11. Drivers of Inflation
0%
2%
4%
6%
8%
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
Renovation, Rent and Fuel
Foodstuff and Beverage
Other
Overall CPI
12 . Imported Inflation
(January 2010 = 100)
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
SAR/GBP SAR/EUR Trade Weighted Dollar
10
facilitatingcreditwortharoundSAR1.6billionbytheendof1H2015to752establishments,representing12%oftheaggregatebeneficiariessincetheinceptionoftheprograminJanuary2006.Inouropinion,supportingSMEsiscriticalforjobcreationandtheexpansionoftheprivatesector,andassuchtheSAR13billionloansthathadbeengrantedovera10-yeartimeframetosuchassetclass,amere1%ofbanks’loanportfolio,needtobeexpanded.Goingforward,thedeclineinoilpricesandtheunfavorablebusinesscyclewitnessedsincethesecondhalfof2014isexpectedtolimitbudgetallocationstoSCIs,makingithardertomaintainthedouble-digitgrowthinloans,yetwedobelievethatnewlendingwillcenteraroundtheviabilityofprojects,inlinewithgovernmentstrategytoprioritizespendingandenhanceefficiency.
10%
Investments by Type
90%
Domestic Foreign
Loans
0%
5%
10%
15%
20%
25%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
3Q11
4Q
11
1Q12
2Q
12
3Q12
4Q
12
1Q13
2Q
13
3Q13
4Q
13
1Q14
2Q
14
3Q14
4Q
14
1Q15
2Q
15
3Q15
SAR Million
Loans Annual Growth, RHS
2.2 Fiscal and External Balances
Dwindling oil revenues have triggered an ambitious government strategy to reduce reliance on oil revenues within 20 years.The2016’sbudgetestimatesrevenuesandexpendituresatSAR513.8billionandSAR840billion,re-spectively,projectinganotherdeficitatSAR326billion.Althoughthebudgetpressreleasedoesnotprovideoilpriceandproductionlevelassumptions,webelievethatbothrevenuesandexpendituresareunderstated.Basedonannouncedrevenues,governmentassumednextyear’soilpricestoaverageUSD35/bbl.WithourforecastofUSD45/bblfortheav-erageArabianlightspotpricesand10.2MMBDforaverageoilproduction,weprojectaslightlysmallerbudgetdeficitatSAR311billion,or13.4%ofestimatedGDPin2016.Theoilglutcontinuestopressurecrudeprices,whichisexpectedtoreduceoilrevenuestoSAR386billion,adeclineof13.1%over2015’sSAR445billion,andinturntotalrevenuesareprojectedtoreachSAR586.3billion.Incontrast,non-oilrevenuesareexpectedtoreachSAR200billionin2016,offset-tingthedeclineontheoilside.The22.3%annualincreaseinnon-oilrevenuesisattributedtotheimplementationofhigherenergyandwaterpricesand,notably,theboostininvestmentincomethathadrisenby69.3%lastyearandislikelytocontinuewiththegovernmentadaptinganactiveportfoliostrategy.Ontheexpenditureside,weexpectgov-ernmentspendingtodeclineby8%toSAR897billion,followinglastyear’sdouble-digitdecreasethatstoodat14.5%,asspendingmeasuresintheRoyaldecreesoflastyearhavenotbeenrolledoutandasthecostcontrolmeasuresin-tensify.Againstthisbackdropofback-to-backreductionsinactualexpendituresandnearrecordcrudeproduction,thebreak-evenoilpricerequiredtobalancethebudgetisestimatedtodeclinetoUSD69/bbl.
The current account balance registered a deficit in 2015, the first since 1998, a situation that will continue well into this year.Basedonouroilpriceandproductionassumptions,weexpectoilexportrevenuestodeclineby12.7%toUSD137.5billion.Ostensibly,weexpectacontractioninnon-oilexportsaspricesforpetrochemicalsandplas-ticsremainpressured.Bothcategoriesconstitutedthemajorityofnon-oilexports,around60%in2015.Bytheendoflastyear,thetotalvalueofpetrochemicalandplasticexportsdroppedby19.6%and26.4%,respectively.China’smod-erationhasaffectedSaudiexportsastheAsiangiantisoneofthemajordestinationsforSaudiproductswithavalueofSAR19.9billion,droppingby25.2%onanannualbasisandretiringfirstplacetotheUAE,whichreceivedSAR24.3billionofdomesticexportsin2015.Asforimports,theyhavemarginallydeclinedonthebackofcontainedglobalprices
NCB PERSPECTIVES | JUNE 2016
11
andastrongerdollar.TotalimportssettledatSAR609.4billion,decliningby6.5%Y/YfromSAR651.9billionin2014.Additionally,falteringdomesticdemandhasresultedinadeclineinthevalueofthesettledandnewlyopenedLettersofCredit(LCs)thatrespectivelyfellby1.2%and8.3%in2015withbuildingmaterialsandmachineryunderpinningthedropduetotheslowingconstructionsector.Accordingly,weexpectthecurrentaccounttorecordadeficitofUSD52.7billionthisyear,8.5%relativetoGDP.Theprolongeddeclineinoilpriceswillcontinuetoweighnegativelyonnetfor-eignassets,withthegovernmentprojectedtowithdrawafurtherUSD70.7billionin2016,yetthisslowerpaceofdrawdownwillbecoveredbymorerelianceondebtissuances.
Low oil prices will weigh on the fiscal and external balances for another year, yet the economy remains solvent given its ample reserves and low debt utilization.Ratingagencies,Moody’s,S&P,andFitch,hadmain-tainedinvestmentgradesfortheKingdom’ssovereignrating,despitetherecentdowngradesduetotheunfavorableimpactonoilrevenues.Thegovernmenthasrecentlytakenstepstowardsfiscalconsolidation,economicdiversification,andsustainability.SaudiArabiahasbeenabletowithstandoilpricevolatilityandtheslowglobaleconomicrecoverybywithdrawingfromitsvastamountofreserves,whichstoodatUSD609.7billion,around90%ofGDPbytheendof2015,thethirdlargestintheworldafterChinaandJapan.Albeittheincrease,publicdomesticdebtstillrepresentedjust5.9%ofGDPlastyearandisexpectedtorisetonear10%asthegovernmenttapsintodomesticandinternationaldebtmarketsintandemwithwithdrawalsfromforeignreservestocontainfinancialshocksandprovidestability.WeexpectamorebalancedapproachinpluggingtheanticipatedfiscalshortfallwiththeKingdomtryingtobenefitfromthe prevailing low interest rate environment.
Sources: SAMA and NCB Sources: SAMA and NCB
13. Government Revenue and Expenditure Balance
SAR billion 2014 2015 2016 Budget 2016 Forecast
Total Revenue 1,044 608 514 586
Oil 913 445 349 386
Non-Oil 127 164 164 200
TotalExpenditure 1,140 975 840 897
Current 740 731 657 718
Capital 740 244 183 179
Deficit/Surplus (96) (367) (326) (311)
Sources: SAMA and NCB
14. Twin Deficits
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2011 2012 2013 2014 2015P 2016F
Current Account Balance / GDP Budget Balance / GDP
15. Government Expenditure
0
200
400
600
800
1,000
1,200
2011 2012 2013 2014 2015P 2016F
SAR billion
Captial Expenditure Current Expenditure
12
Saudi Vision 2030 provides the blueprint to move away from an oil-centric economy, vital to that is diversi-fying the economy in every sphere: economic, human, and social. Thevisionistargetingsustainableeconomicdevelopmentbasedonthreepillars,beingtheheartoftheIslamicworld,beingidentifiedasaninvestmentpowerhouse,andexploitingthestrategicgeographicallocationofthecountry.ThecumulativeoutcomeofthemyriadprogramsisexpectedtoincreasethesizeofthedomesticeconomybyalmosttwofoldtoovercomethelikesofSwitzerland,Turkey,and Mexico to achieve the target of being the 15th largest economy globally. Emphasizing the role of private enterprises inVision2030willenhancetheprivatesectorcontributiontorealGDPto65%andmagnifyforeigndirectinvestmentto5.7%ofGDPin2030,upfromthecurrent3.8%.Thegovernmenttargetofincreasinghomeownershipfrom47%to52%by2020impliesadamancytomitigatethehousingshortagethathadconstitutedachallengeoverthelasttwodecades.SMEswillcontinuetoreceivethemuchneededsupportthrougheasingregulationsandgreateraccesstofund-ingastheircontributiontoGDPisplannedtoincreasefrom20%to35%.
Fiscalconsolidationisalsoanintegralpartofeconomicsustainability,withthegovernmentstreamliningsubsidiesandplanningtopropelnon-oilrevenuesfromSAR163billionin2015toaroundSAR600billionby2020,whichaccordingtothegovernmentwillbalancethebudgetatthattime.Onalonger-termhorizon,theinvestmentfocusofbuildingthelargestsovereignwealthfundwithaplannedvalueofSAR7trillion,partlybysellinga5%stakeinSaudiAramco,willpropelinvestmentincomethatwillexceedoilrevenuesby2030.Additionally,thisfundwillallocate50%ofitsportfolioin international investments to reach the colossal target. The social aspect of the vision is targeting a decrease in the unemploymentrateto7%aswellasincreasingfemaleparticipationrateto30%throughprovidingjobsforSaudis,namely1millionjobsintheretailsectorand90’000jobsintheminingsector.Inthistransitionphase,higheroilpriceswillbeusedasacatalystforacceleratingthevisionratherthananimpediment.
2.3 Monetary Developments
The monetary situation in the Kingdom is largely reflective of the oil narrative.OversuppliedoilmarketandastrongerUSdollarpressuredoilpricestosubstantially lowlevels, leadingtoagapingovernmentspending.Thus,growthprospectsinSaudiArabiaremainheavilydependentonthesinglecommoditydespitediversificationefforts.Duetolaggingeffect,weonlystarttonoticeadecelerationinmoneysupplygrowthearly2015,endingtheyearat2.6%toreachSAR1.78trillion.In2016,thegrowthratedeceleratedfurther,fallingintonegativeterritory.Asglobaloilmarketsareexpectedtoremainsluggishthroughoutthisyear,wedonotseeashort-termreboundinliquidity.MonetarypolicyatSAMAremainsdedicatedtopreservingthedollarpegwithnoroomforeasing.SAMAbillholdingsbySaudibanksdeclinedby39.7%Y/YtoSAR136.3billioninordertofreebankliquidityforthelongermaturitygovernmentissuances.Onthefiscalfront,thegovernmentreliedonforeignreservesduring2015,withdrawingaroundSAR115.9billiontofinancethebudgetdeficit,thuserodingreserveassetsby15.8%comparedtoayearago.Duringthesecondhalfof2015,thegovernmentissuedsovereignbondswithvaryingmaturities,5-year,7-year,and10-years,tappingintotheunutilizeddebtcapacityoftheKingdom.
Sources: SAMA and NCB Sources: SAMA
17. Government Deposits at SAMA
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
SAR billion 2011
+194 bn 2012
+329 bn 2013
+125 bn 2014 -80 bn
2015 -398 bn
16. Domestic Public Debt
-60%
-40%
-20%
0%
20%
2008 2009 2010 2011 2012 2013 2014 2015P 2016F
Gross Domestic Public Debt/GDP Net Domestic Public Debt/GDP
NCB PERSPECTIVES | JUNE 2016
13
In 2015, the monetary base grew by 6.6% to SAR301.5 billion, which is considerably below 2014’s 10.5% growth. Themainculpritinthesubparmonetarybaseperformanceisthedwindlingofpublicfinancialinstitutions’depositsby50.7%tojustSAR4.7billion.Currencyoutsidebanksistheonlymoneysupplycomponentthatmaintainedadouble-digitannualgrowth,surgingby10.1%toSAR169.3billion.Demanddeposits,whichaccountedforthelarg-estcomponent,makinguparound55%ofbroadmoneysupplyrecordedanannualizeddeclineof1.3%toSAR976.2billion.Ontheotherhand,wenotethatthepropensitytosavehasincreasedduring2015asindicatedbythegrowthoftimeandsavingsdepositsby9%Y/Y,totalingSAR434.5billion.Quasimonetarydepositsthatincludedepositsofforeigncurrency,marginaldepositsforLCs,andoutstandingremittancesedgedupby3.4%toSAR194billion.Overallbroadmoneysupplyroseby2.6%in2015andisexpectedtodeceleratefurtherduetolowergovernmentspendingand slower economic growth.
Sources: Thomson Reuters and SAMA
Sources: SAMA
Sources: Thomson Reuters
Sources: SAMA
19. Interbank Market Rates
0%
1%
2%
3%
4%
5%
6%
May-08
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
3M SAIBOR 3M USD LIBOR
18. SAMA and US Federal Reserve Policy Rates
0%
1%
2%
3%
4%
5%
6%
May-08
May-09
May-10
May-11
May-12
May-13
May-14
May-15
May-16
Reverse Repo Rate Repo Rate Federal Funds rate
20. Growth in Money Supply
-10%
0%
10%
20%
30%
40% M
ar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
M3 M0 12m MA, M0
21. Growth in Private Sector Credit
-5%
0%
5%
10%
15%
20%
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
14
Sources: Tadawul Sources: SAMA
2.4 Financial Sector
The money creation cycle is grinding to a halt, with the influx of recent years dissipating as oil revenues plunge sharply and in turn government spending declining by double-digits. Total deposits in the banking sys-temregisteredamere1.9%gainlastyear,theweakestgainsincetheGulfWar.SaudiBanksprimarilyrelyondepositstoexpandtheirbalancesheetsbyextendingcreditlinestotheprivateandpublicsector.Consequently,totalclaimsofthebankingsystem,excludingT-billsandgovernmentbonds,deceleratedto8.9%Y/Yfor2015.Despitethechallenges,Saudibankswereabletogrowtheirnetprofitsby5.4%lastyeartogenerateacollectiveSAR43.7billion.Thecurrentcostoffundsremainslowasover60%ofdepositsarenon-interestbearing,whichwillallowbankstoprofitfromhighermarginsasinterestratescreephigheroverthemediumterm,yet,thechallengewillbetoremainliquidinordertograsplucrativeopportunities.In2016year-to-date,withprivatecreditgrowthoutpacingdeposits,theLoans-to-Deposits(L/D)ratioreached88.7%bytheendofApril,promptingSAMAtoraisetheguidancelimitto90%from85%.RisingL/Dra-tiocoupledwiththeincreasedissuancesofsovereignbondshavestressedliquiditylevels,asevidentfromthecontinuedriseininterbankrates.Inouropinion,asthegovernmentretractsfrombeingthedrivingforceforexpenditureandtheprivatesectortakesonamoreactiverole,creditdemandwillpickupafterthistransition.
After entering a bear market territory in January, Tadawul found some reprieve, rebounding from its bot-tom and is expected to end the year on the positive side.During2015,astrongpositivecorrelationof0.88hasbeenregisteredbetweenoilpricesandTadawul’smainindex,underscoringthenegativedragontheindexlastyear,whichfellbya17.1%.Equityinvestors’riskaversenessresonatedfromthefiscalchallengestheeconomycontinuestoface.Inaddition,thegeopoliticaltensionshaveweighedonstocksastheongoingmilitaryinterventioninYemen,theheightenedpoliticalstand-offwithneighboringIranoverSyriaandotherissuesdiscouragedinvestors.The11approvedQualifiedForeignInvestors(QFIs)thatwereallowedtoaccessthemarketsincethefirsthalfof2015didnotprovidetheinstitutionalsupportexpectedyet,withtheirtotalownershipcurrentlystandingatjustSAR1.2billion,aninsignificant0.09%ofTadawul’smarketcapitalization.
Furthermore,tradingactivityin2015experiencedaslowdownasaveragedailytradingvaluesdeclinedby22.9%Y/YtosettleatSAR6.6billion.Corporateprofitabilityalsodeclinedby13.7%annually,recordingSAR98.7billion,bringingtheprice-to-earningsratiodownto13.8,anattractivepropositionconsideringtheDow’sandS&P500’sratiosataround15and20,respectively.Movinginto2016,theCapitalMarketAuthorityannouncedanambitiousplantoincreasethemarket’scapitalizationtomirrortheeconomy’ssize.Theplanalsoincludeseasingregulationsforforeigninvestorsandanarrayofproductssuchasderivatives,debtproducts,andrealestateinvestmenttruststocaterformoresophisticatedinvestors.Furthermore,thedepthofthemarketisexpectedtoreachatotalof250companieswithinsevenyears.WhileinvestorshaveshowngreatinterestinInitialPublicOfferings(IPO)overtheyears,itwillbequitechallengingtoenticecompaniestoturnpublicgiventhecurrenteconomicdynamicsofriskaversionandexpectationsoflowercorporateprofitability.During2015,onlyfourcompaniesturnedpublic,downfromsixayearago,andthetotalvalueraiseddroppedby83.5%annuallytosettleatSAR4.15billion.However,aspartofSaudi’stransformationplan,oilgiantSaudiAramcoisexpectedtogopublicnextyearinanefforttoestablishaUSD2trillionsovereignwealthfund.Eventhoughlessthan5%ofthecompanywillbeoffered,theIPOwilllikelyenhancetheprimarymarketperformancebyattractinglocal and international investors.
22. Saudi Equity Market Index(January 2009 = 100)
-25%
0%
25%
50%
75%
100%
125%
150%
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Tadawul Index
23. Saudi IPO Issuance
0
1
2
3
4
5
6
7
8
9
10
0
5,000
10,000
15,000
20,000
25,000
30,000
2010 2011 2012 2013 2014 2015
SAR million
Capital Raised Number of Issues, RHS
NCB PERSPECTIVES | JUNE 2016
15
The global economic slowdown diminished the appeal for alternative financing, with global Sukuk issu-ances falling by 38.8% Y/Y in 2015 to USD66.8 billion, raised through 727 issuances.MalaysiacontinuestorepresentthelargestmarketforSukuk,albeitrecordingasignificantdecline.ThetotalvalueofMalaysianissuancesreachedUSD34.8billion in2015,halfof its2014level. IndonesiatooksecondplacewithavalueofUSD8.2billionthrough84issuances,growingby64.6%and52.7%intermsofvalueandnumberofissuances,respectively.AsforSaudiArabia,theissuanceof16SukukwithatotalvalueofUSD7.0billionplaceditthirdin2015onaglobalscale.Thismarksthesecondconsecutiveannualdropafterreachingarecordlevelin2013atUSD15.2billion.Theslowdowninthedomesticbusinesscycleisexpectedtolessentheneedforextensiveissuancesoverthenear-term.Eventhoughtherecentgovernmentbondissuanceswillactasabenchmarkforfutureissuances,therelativelyhigheryieldsofferedbythegovernmentarelikelytoraisethecostoffundingforcompaniesoptingforIslamicfinancing.Overall,weexpectamoderationintheSukukmarketgoingforward.
2.5 Risks
Systemicmacroandbankingsectorrisksarestilllow.Nevertheless,theheftysurplusesofrecentyearshavereversedduetothesignificantdeclineinoilprices,whichwillnecessitatecountercyclicalpolicies.Acrowding-outeffectandtighterli-quidityamidtherisingissuancesofgovernmentdevelopmentbondsmightbechallengingtobanks,butinreducingthestockofT-billsandeasingtheL/Dguidancelimitto90%from85%,SAMAwillbeabletomitigatetheserisks.Gaugingtherisksonthebankingsystemthroughnon-performingloans(NPLs)revealsthatbanksarewellpoisedtocounterpos-siblefutureshocks.Yet,aslesseroilrevenuestrickledownintotheeconomy,andthebusinessenvironmentbecomesmorechallenging,NPLsarelikelytoincrease.ThecurrentlycontainedNPLratioillustratestheprudentmanagementandsupervisorypracticesthathavebeenappliedbybanksandSAMA.Bythefourthquarterof2015,banksregisteredanindustry-wideNPLratioof1.1%,incomparisontothe1.9%recordedduring2004-2008.Saudibanks’tier1ratioinspecificandthecapitaladequacyratioingeneralareatcomfortablelevels,currently,at16.2%and18.1%,respectively,doubletheBasel’sIIIrequirements.Figure26belowdepictskeymacroandbankingsectorvulnerabilityindicatorsofSaudiArabiabetween2010until2015.
24. Saudi Sukuk Issuance
0 2 4 6 8 10 12 14 16 18 20 22
0
2
4
6
8
10
12
14
16
18
20
2010 2011 2012 2013 2014 2015
USD billion
Debt issued Number of issues (RHS)
Sources: Zawya Sources: Zawya
25. Saudi Share of GCC Sukuk Issuance, 2015
36%
64%
KSA Rest of GCC
16
KeySystemicMacroandBankingSectorRiskIndicators
2010 2011 2012 2013 2014 2015
1. Macro Risks
OverallBudgetBalance/GDP 4.4% 11.6% 13.6% 6.5% -3.4% -15.0%
GrossDomesticPublicDebt/GDP 8.5% 5.4% 3.6% 2.2% 1.6% 5.9%
NetDomesticPublicDebt/GDP -41.8% -41.9% -51.5% -56.7% -53.6% -41.7%
NetBankingSectorClaimsontheGovernment(SARbn) (931.6) (1,140.4) (1,474.3) (1,591.9) (1,507.6) (1,076.4)
OverallCurrentAccountBalance/GDP 12.7% 23.6% 22.4% 18.2% 10.2% -6.3%
Net Factor Income/Merchandise Imports 5.6% 6.8% 6.6% 7.7% 8.7% 5.2%
NetForeignAssets/ImportsofGoodsandServices 254.3% 272.0% 302.9% 313.7% 283.9% 260.5%
Net Foreign Assets/M2 178.8% 188.2% 200.5% 199.8% 176.2% 144.5%
MerchandiseImportCoverage(1YRaheadimports,inmonths) 54.8 54.0 55.3 56.6 54.9 51.6
2. Banking Sector Systemic Risks (11 Locally Incorporated Banks
Loan-to-Deposit Ratio 73.9% 74.2% 75.9% 77.4% 77.4% 82.5%
MinimumRiskAssets/TotalAssets 34.9% 33.8% 32.7% 31.4% 31.7% 4.4%
CashandBalanceswithSAMA/TotalAssets 11.1% 11.7% 12.5% 10.6% 9.5% 6.8%
Tier1CapitalAdequacyRatio 16.6% 16.1% 15.8% 16.4% 16.2% 16.2%
NonPerformingLoan(NPL)Ratio 2.9% 2.3% 1.9% 1.4% 1.1% 1.1%
NPLCoverageRatio 115.7% 133.2% 145.3% 157.4% 182.9% 172.3%
26. Key Systemic Macro and Banking Sector Risk Indicators
Sources: Financial statements of commercial banks, SAMA and NCB
NCB PERSPECTIVES | JUNE 2016
17
The Economics Department Research Team
Please contact: Mr. Noel RotapTel.: +966-2-646-3232 | Fax: +966-2-644-9783 | Email: n.rotap@alahli.com
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Macroeconomic Analysis
Head of Research
Said A. Al Shaikh
s.alshaikh@alahli.comHead of Economics
Tamer El Zayat
t.zayat@alahli.comSenior Economist/Editor
Yasser A. Al-Dawood
y.aldawood@alahli.comEconomist
Majed A. Al-Ghalib
m.alghalib@alahli.comSenior Economist
Sector Analysis
Ahmed Maghrabi
a.maghrabi@alahli.comAssociate Economist
Sultan Mandili
s.mandili@alahli.comEconomist
Hanan M. Al Asiri
127887@alahli.comEconomist
Sharihan Al-Manzalawi
s.almanzalawi@alahli.comAssociate Economist