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SAUDI ARABIA
ECONOMICS
January 2011
Dr. John Sfakianakis
Chief EconomistTel: +966 1 289 1797Email: [email protected]
Daliah Merzaban
Economic Analyst
Tel: +971 4 428 3608
Email: [email protected]
Turki A. Al Hugail
Economic Research Analyst
Tel: +966 1 289 1163
Email: [email protected]
January 25, 2011
Splitting the billState eyes private sector, bank revival to press growth
Economic growth to accelerate to 4.2% in 2011, with private
sector growth of 4.2% relieving some of states burden
Banks well positioned to boost lending to the private sector by
9.1% this year, but return to double-digit growth not likely for
another year
High oil prices, project financing, real estate mismatch and
population growth among factors to shore up non-oil sectors
Government to post twin fiscal and current account surpluses
as global energy demand growth continues
Consistent oil price gains in the early part of 2011 have set the stage for a respectable turna-round in Saudi economic activity this year. GDP growth in the worlds top oil exporter lookspoised to accelerate due to a blend of higher crude oil output, state stimulatory spending on
strategic projects and quicker private sector expansion. Whereas in 2010 the government pre-dominately shouldered the burden for financing projects, the private sector is likely to becomeprogressively more engaged in the recovery process this year.
Bank lending should pick up steadily though not significantly, inflationary pressures are ex-pected to moderate on the whole but remain historically elevated, and the government shouldpost sizeable budget and current account surpluses that would enable it to further pay downdomestic debt and augment its foreign assets store.
Underpinning the optimistic outlook is a view that oil prices are poised to hold ground above$80 a barrel. Other than 2008 when prices soared to record peaks near $150, an average priceabove $80 a barrel in 2011 would be the highest annual price recorded this decade. Still, oilproduction, set to rise to 8.48 million barrels per day (mbpd) from 8.2 mbpd in 2010, remains
well below the average 9.1 mbpd produced from 2004 to 2008.
The government will thus rely on its own financial muscle and private sector participation tochannel economic growth along an upward trajectory. Since the onset of the financial crisis,the state has taken up the slack for keeping the economy in motion. In 2010, the governmentsector expanded at its fastest pace in 13 years of 5.9%, far outpacing private sector growthof 3.7%.
Relying on government-led growth would not form a practicable policy in the long term andwe have already witnessed evidence that the state is eager to re-integrate local and globalinvestors in the development process. This will take time, however, and the 2011 Saudi budgethit another record with planned expenditures. The government has nonetheless deliberatelyslowed down the pace of growth in spending allocations to minimise overspending and compel
private businesses to return to the drawing board.While private sector GDP growth is likely to rise to 4.2% this year and to 4.5% in 2012, thesectors rate of growth is still lags pre-financial crisis levels and in our view is not high enoughto generate an adequate stream of new jobs needed to substantially reduce unemploymentand relieve the recruitment strain from government departments.
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In the five years to 2008, private sector GDP expanded
5.5% per year on average; between 2009 and 2013 the
sectors annual growth should slow to 4.2%, according to
our estimates. The government is therefore confronted with
a challenge to extensively re-integrate the private sector in
development both through public-private partnerships and
independently. A major overhaul is needed in private sector
job creation for Saudi nationals; in 2009, they accounted for
just 9.9% of total private sector employees.
The public sector continues to act as an employer of last
resort for Saudis; in 2009 it hired 71,900 Saudis while the
private sectors Saudi employment figure fell by 147,576
jobs. The private sector created 821,177 jobs in 2009, ac-
cording to official data, but solely relies on expatriate labour
for expansion, an alarming trend that should be reversed to
accommodate the local job market.
On the monetary policy front, we foresee no changes in in-
terest rate policy as the central bank seeks to encourage
healthy bank lending, but we could see a slight hike in the
benchmark repurchase rate around 2012 as markets nor-malise further.
State still navigating recovery
On the heels of the financial crisis, the Saudi economydecelerated quickly at the end of 2008 and throughout
2009 due to a combination of factors, including the dropin oil prices and global oil demand, and the cancellationor postponement of tens of billions of dollars in expansion
projects. In addition, many local and foreign private sectorcompanies decided to wait out the crisis on the sidelinesand credit markets dried as banks contended with a non-performing loan challenge.
With strong oil prices and better demand from Asia in 2010,the Saudi economy worked at jumpstarting the recovery and 2011 promises to continue cementing this. To sup-port an improvement in the economic climate, the govern-ment has pledged to keep spending at historically highlevels throughout the 2010-2014 five-year plan, including
investment commitments of $385 billion. It continues to
GDP at constant prices 2011 Ratio 2010 Ratio 2011 growth rate
Oil sector 247.01 27.2 238.65 27.3 3.5
Private sector 436.12 47.9 418.57 47.9 4.2
Government sector 216.68 23.8 205.81 23.6 5.3
Import duties 10.39 1.1 10.09 1.2 3.0
Total GDP at constant prices 910.20 873.12 4.2
Source: CDSI, Banque Saudi Fransi forecasts
Source: CDSI, Banque Saudi Fransi forecasts
0
7
(YoY%c
hange)
Private sector GDP likely to pick up pace as government steps a bit back
2010e 2011f 2012f
Agriculture Mining &
Quarrying
Manufacturing Electricity ,
Gas and water
Construct ion Wholesale &
retail trade
Transport,storage
and comms
REAL GDP
1
2
3
4
5
6
Finance,
insurance,
real estate
Community,
social and personal
services
Producers of
government
services
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overspend its budget by, in the case of 2009 and 2010,
25.5% and 16%, respectively, to ensure funds get wherethey need to be.
Yet prolonged fiscal expansion would not be healthy forthe country, hence the emphasis placed on private sectorparticipation in the five-year plan. The government is aim-
ing for the private sector to grow 6.6% per year during theplan period, the key thrust behind ambitious growth of 5.2%per year. In our view, these growth projections are virtually
impossible to achieve if current circumstances persist. Wehave seen little evidence of efforts to nurture and organ-ise the small- and medium-sized enterprise sector, which
would be necessary to generate higher rates of growth.
At present, it is government gross fixed capital formation
(GFCF) that has led the way in domestic investments. Be-
tween 2000 and 2010, government GFCF surged eight-fold,
according to our estimates, while private sector GFCF about
doubled. In 2009 state GFCF rose almost 9% as private GFCF
fell 2.2%. Private sector capital formation growth rates are
likely to pick up in the coming two years as companies offer
more expertise and financial support for projects in energy,
utilities and infrastructure. However, state investments will
continue to dominate the funding space.
Oil revival steering growth
Although a cautious atmosphere prevails, the scope for en-
thusiasm is wide due to oil market fundamentals. High oil
Real GDP growth rates 2005 2006 2007 2008 2009 2010e 2011f
Agriculture 1.2 1.1 1.9 0.7 0.6 0.5 0.7
Mining& Quarrying 6.6 -1.1 -4.0 4.2 -7.9 2.2 3.5
Manufacturing 6.9 6.3 5.7 6.0 2.3 5.0 5.1
Electricity, Gas and water 5.4 6.4 4.1 6.7 6.8 6.0 6.2
Construction 4.8 7.3 4.1 1.5 4.7 3.7 4.2
Wholesale & retail trade 4.4 6.1 6.2 6.5 2.5 4.4 4.7
Transport, storage and comms 8.7 9.8 10.2 12.2 6.9 5.6 5.9
Finance, insurance, real estate 6.4 4.6 3.8 2.4 3.7 1.4 2.7
Community, social and personal services 5.1 5.0 2.7 2.4 4.0 3.8 4.3
Producers of government services 3.3 1.9 1.9 2.4 3.8 5.9 5.3
Import duties 5.7 4.1 3.3 2.7 1.8 2.6 3.0
Real GDP growth rate 5.6 3.2 2.0 4.2 0.6 3.8 4.2
Source: CDSI, Banque Saudi Fransi forecasts
Government capital formation makes 8-fold surge between 2000-2010
0
250 29
15
Source: CDSI, SAMA, Banque Saudi Fransi forecasts
(SR,
bn)
(%ofGDP)
Gross fixed capital formation as % of GDPPrivateGovernment
2011f1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f 2012f
50
100
150
200
17
19
21
23
25
27
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ECONOMICS
January 2011
prices translate into robust revenues for the kingdom, buy-
ing it some time to bring round private capital.
Oil sector GDP growth is likely to expand 3.5% this year, up
from about 2.2% in 2010, owing to a rise in production and
persistent growth in global demand. The Energy Information
Administration (EIA) forecasts world oil consumption will
grow 1.45 mbpd in 2011 to 88.02 mbpd, with almost 37%of new demand arising in China. This marks a slowdown
in consumption growth from 2.02 million bpd in 2010 and
yet illustrates an overall positive trend. The EIA anticipates
another 1.6 mbpd of consumption growth in 2012. Saudi oil
production is likely to grow 3.5% this year to 8.48 million
barrels per day, according to our forecasts.
With oil prices now within striking distance of $100 a barrel,
Saudi Arabia is well positioned to reap great advantages. As
of November, the Saudi Arabian Monetary Agency (SAMA)
had accumulated SR1.64 trillion ($433.7 billion) in foreign
assets, taking the stash back to pre-2009 levels. We project
that by the end of 2011, the kingdom will have built its for-
eign assets to $470.8 billion, a record level and more than
98% of GDP.
Real GDP growth for the Saudi economy should climb to 4.2%
this year, including the 3.5% rise in oil GDP activity (account-
ing for 27.1% of GDP). We anticipate GDP growth will rise to
4.4% in 2012, the fastest rate of growth since 2005, once
lending activity returns to normal and private sector compa-
nies take meaningful steps to improve their contributions.
Source: EIA Short-Term Energy Outlook
-2.000
2.000
(Millionbarrelsperday)
Fuel consumption growth seen easing in 2011, China leads
China United States Other
2007 2008 2009 2011f2010
-1.500
-1.000
-0.500
0.000
0.500
1.000
1.500
30
90
(WTI,USD/bbl)
EIA expects oil prices in $80-$90 range in 2011
2010 Mar May Jul Sep Mar May Jul SepNov Nov2011f2009 Mar May Jul Sep Nov
35
40
45
50
55
60
65
70
75
80
85
Source: EIA
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Growth of the government sector which accounted for just
under 24% of GDP in 2010 should slow slightly to 5.3%
this year from 5.9% last year, as the private sector relieves
some of its funding burden. Including last year, government
sector GDP growth exceeded 5% only three times in the
past two decades.
Substantial fiscal outlays have supported growth. The 2011
budget includes expenditures of SR580 billion for 2011, al-
though we expect actual expenditures of closer to SR676
billion indicating 16.6% overspending. The states 2010fiscal surplus, at SR108.5 billion or 6.7% of GDP, was more
than double our forecast. We anticipate the surplus fall to
SR93 billion, or 5.2% o GDP, this year due to a 4.6% in-
crease in revenues to SR769 billion.
Reinforcing the private sector
The private sectors growth rate will be motivated by higher
oil price environment, increased demand for petrochemi-
cals and continued state stimulatory spending. Private
sector companies spent much of the past two years de-
leveraging and regrouping, and many of them should beginto pursue expansion again this year.
This will necessitate that they obtain some funds from
banks and from equity and bond markets all of which
should be accommodating. Numerous sovereign and cor-
porate issuers have already exploited better bond pricing as
yields declined.
This month, the civil aviation authority indicated a plan toissue $4 billion of Islamic bonds to help finance airport pro- jects. Saudi International Petrochemical Co also wants toraise at least $400 million this quarter to finance the firstethyl acetate plant in the region, while in December SaudiElectricity Co. (SEC) finalised a 15-year Islamic financingworth $1.33 billion to fund projects designed to build powergeneration capacity.
We expect that state firms will work to involve private com-panies more thoroughly in their projects. SEC for one, is
hoping the private sector will contribute about $24 billionof the $80 billion projected investment bill it envisions willbe necessary to boost power generation capacity to at least70,000 megawatts by 2020 from 50,000 MW now.
Following is a discussion of some of trends we foresee tak-ing place in Saudi Arabias key non-oil private sectors thisyear.
Finance
The finance sector has suffered from low rates of growth
in recent years and 2010 did not diverge from this trend.Up to November, cumulative bank profits reached SR24.22billion, down 10.8% from SR27.15 billion in November of2009. Net earnings of Saudi banks have fallen in each yearsince 2006 after soaring 185% between 2004 and 2006.Cumulative bank profits at the end of 2010 were lower thanthey were in 2005 when profits of banks leapt 54% from
the year earlier. The low interest rate environment has en-
croached on bank profitability.
Finance sector growth drops along
with bank profits
0.0
7.0
10
40
2004 2005 2007 20092006 2008 2010*
(SR,
bn)
(YoY%change)
Source: SAMA
Finance, insurance GDP growthCumulative bank profits
1.0
2.0
3.0
4.0
5.0
6.0
15
20
25
30
35
* Up to November
Credit growth turnaround slow
-5
40
300
1000
2005 2007 20092006 2008 2010* 2011f 2012f
(SR,
bn)
(YoY%change)
Source: SAMA, Banque Saudi Fransi forecasts
YoY % changeCredit to private and public sectors
0
5
10
15
20
25
30
35
400
500
600
700
800
900
* Up to November
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Bank asset growth has also fallen markedly in Saudi Arabia.
As of November, total bank assets grew 2.3% from the end
of 2009 positioning banks for their slowest rate of asset
growth since 1990. Between 2005 and 2009, bank assets
grew 16.8% per year, on average.
Given the weak statistics, it is no wonder the finance sec-tors GDP growth rate slowed to just 1.4% in 2010, ac-
cording to initial estimates. That is below the 3.7% growth
recorded in 2009 and is the slowest pace of expansion for
the sector since 1998. By comparison, the finance sectors
growth rate was as high as 6.4% in 2005 at the peak of
bank profitability.
Then, the 2006 stock market crash revealed the vulner-
ability and exposure of Saudi banks to equity investments
and banks profits and the sectors growth took a hit. The
equity crash and the financial crisis, which compelled lend-ers in the kingdom to take large provisions to guard against
bad debt, have obliged banks to rethink how they do busi-
ness, and particularly to whom they lend funds. Private sec-
tor lending fell in tandem from double-digit growth ratesin most years of the past decade to a slight contraction in
2009. Bank lending failed to gain considerable momentum
in 2010, touching a lower-than-expected 6%.
We do not expect to witness a return to double-digit rates
of loan growth before 2012, with a fuller recovery in 2013,
as a stream of project financing deals bolsters the balance
sheets of banks. Meanwhile, lenders have focused more
attention on their retail businesses. The number of newbranches opened in 2009 and 2010 was 19-fold higher
than 2005 at the peak of bank profitability.
Despite persistent caution, we expect a good turnaround
in credit growth this year as there is adequate pent up de-
mand to support growth in bank claims on the private sec-
tor of 9.1%, including private sector credit growth of 8.8%.
Total bank credit, including to state enterprises, should
grow 8.6%. These factors support our finance sector GDP
growth forecasts of 2.7%.
We do not foresee any change to SAMAs exchange rate
policy in 2011. The U.S. dollar remains well below the key
Bank asset growth slowest since 1990
0
1500 26.0
-2.0
Source: SAMA
(SR,
bn)
(YoY%change)
GrowthBank assets
1990 1992 2000199819961994 2002 2004 2006 2008 2010*
100
200300400500600700800900
10001100120013001400
0.0
2.0
4.06.08.0
10.012.0
14.016.018.0
20.022.024.0
* Up to November
Banks pushing retail business amid slower
sector-wide growth
0.0
7.0
0
120
(Newb
ranches)
(YoYGDP%change)
Source: SAMA
Finance, insurance GDP growthNew branches opened
1.0
2.0
3.0
4.0
5.0
6.0
20
40
60
80
100
2004 2005 2007 20092006 2008 2010*
* Up to November
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1.50 mark vis--vis the euro, last crossed in late 2009 when
oil prices were about $20 lower than they are now. Hence,
we do not anticipate the return of speculation on a change
in currency policy. Interbank rates have remained mostly
steady during 2010. The three-month interbank offered rate
stood at 0.75% in early January, little changed on the year.
Interest rate policy is likely to remain static this year, al-though SAMA does have some freedom to modify rates in-
dependent of U.S. policy. It has been more than two years
since the Fed reduced rates to 0-0.25%; interest rates in
the United States and other advanced economies are likely
to remain unchanged this year.
Construction
Growth of Saudi Arabias construction sector fell to 3.7%
in 2010 from 4.7% in 2009, according to the initial esti-
mates. With the scale of construction taking place on theground, the sectors growth appears underestimated and
the rate could be revised upward as the year progresses.
Cement sales grew 13% in 2010, slightly slower than the
16% growth recorded in 2009.
We project an upturn in construction activity in 2011 sup-
porting growth of 4.2% as more real estate projects reach
fruition as builders take steps to bridge the gap between
supply and demand. Work on major infrastructure projects
in energy, utilities and infrastructure also carries on across
the country. In the holy city of Makkah, billions of dollars are
being funnelled into residential and hotel projects to cater
to growing religious tourism. The Royal Mecca Clock Tow-
er across from the Grand Mosque in Mecca is just one of
many such ventures in the holy city, where an abundance of
cranes are now erected in the vicinity of Islams holiest site.
Construction activity is principally backed by state infra-
structure spending and a deficit in available housing. Inits 2010-2014 development plan, the government targets
construction of one million housing units, or about 200,000
per year. With the market undersupplied, real estate prices
faced upward pressure last year. The BSF H2 real estate
survey showed the median price of a large apartment in 12
Saudi districts surveyed climbed 4.7% from the first half
of the year, while villa prices were up an average of 9.5%.
Similar price trends can be expected in 2011 as the de-
mand-supply mismatch continues and investors prepare for
the launch of Saudi Arabias much-delayed mortgage law.
Manufacturing
Saudi Arabias manufacturing sector made a good come-
back in 2010, growing 5% after real GDP expansion slowed
to just 2.3% in 2009, the lowest rate of growth since 1991.
Manufacturing utilises comparative advantages in labour,
energy and capital inputs.
The return in domestic and global demand for petrochemi-
cals helped reinvigorate the sector in 2010. Profits of Saudi
Basic Industries Corporation (SABIC) surged 46% in the
2010 manufacturing GDP growth recovers from 18-year low
20
120 16
0
Source: SAMA
(SR,
bn)
(YoY%change)
GrowthManufacturing GDP
1991 1993 2001199919971995 2003 2005 2007 2009 2011f
30
40
50
60
70
80
90
100
110
2
4
6
8
10
12
14
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third quarter and 27% in the fourth quarter, above expecta-
tions as sales volume for plastics and petrochemicals im-
proved and energy prices rose broadly. In the year to No-
vember, petrochemical exports soared more than 60% and
plastics exports more than 45%, according to preliminary
CDSI non-oil export data. Profits of all listed petrochemical
firms almost tripled last year.
This year should witness a similar scenario. The petro-
chemical sector is likely to reap the benefits of higher en-
ergy prices and the continued demand growth from Asia.
We anticipate manufacturing GDP growth will climb to
5.1% this year. From 2004 and 2008, manufacturing GDP
expanded 6.3%, on average, so the improvement this year
would not yet take it back to pre-financial crisis levels.
At home, output will get a boost from the giant, SR20.6 bil-
lion Maaden phosphates plant as commercial production
starts in Q3 2011. Located at Al Jalamid, the phosphate
mine and beneficiation plant will produce 3 million tonnes
per year of di-ammonium phosphate fertiliser, representing
about 10% of global demand.
Wholesale and retail trade
Wholesale and retail trade GDP growth should speed up to
4.7% this year from 4.4% in 2010 as a consequence of bet-
ter consumer demand. The sectors GDP expanded more
than 6% in each of 2006, 2007 and 2008, before growth
slowed to just 2.5% in 2009. Consumer demand in Saudi
Arabia is much more price sensitive than is the case in most
-30
110
(YoY%c
hange)
2010 non-oil exports improve with oil prices
2007 Apr Jul Oct 2008 Apr Jul Oct 2009 Apr Jul Oct 2010 Apr Jul Oct
-10
10
30
50
70
90
Source: CDSI Growth in non-oil exports
-30
50
(YoY%c
hange)
Imports recovery slowly from 2009 drop
2007 Apr Jul Oct 2008 Apr Jul Oct 2009 Apr Jul Oct 2010 Apr Jul Oct
-20
-10
0
10
Source: CDSI Growth in imports
20
30
40
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Gulf countries, although it rests on a solid foundation of a
population exceeded 27 million representing almost 60%
of the total Gulf population. As a consequence of this, and
the populations young age demographic, consumer de-
mand has continual potential to expand.
Trade flows out of Saudi Arabia improved markedly in 2010,gaining 23% on the year earlier, when export revenues had
tumbled almost 40%. Strong oil revenues and the rise in
non-oil trade mentioned earlier should give export revenues
another 6.6% boost in 2011, our forecasts show. Saudi ex-
ports are highly dependent on the price of and demand for
oil; oil exports accounted for 86% of total estimated export
revenues of $236 billion last year. Oil export revenues are
set to grow 4.5% in 2011 after expanding 24.6% in 2010.
Non-oil exports, meanwhile, should maintain growth of
around 13.2% in 2011, on par with expansion in 2010.
Imports have taken longer to recover. In 2010, initial esti-
mates show imports advanced less than 1% from 2009. We
anticipate that 2011 import flows will moderately improveas retailers and wholesalers build inventories in order to
meet growing domestic demand. A majority of company
leaders who responded to our Q1 Business Confidence sur-
vey said they would raise inventories in the next two quar-ters.
The states expansion plans also necessitate a greater vol-
ume of building material and machinery imports this yearas construction projects progress. In the first 11 months of
2010, there were 24.9% more new letters of credit issued
against the import of goods than the year earlier. Imports
are likely to track private consumption patterns in 2011 andas a result, we forecast imports will rise to SR97.4 billion
this year, almost 12% above SR87 billion in 2010.
With higher imports, slower export growth and a continualrise in workers remittances, Saudi Arabias current account
surplus will likely fall slightly in 2011 to SR236.81 billion,
or 13.2% of GDP, from a higher-than-expected surplus of
SR260.9 billion in 2010 (16% of GDP). In the foreseeablefuture, we do not expect the current account surplus to ex-
ceed 24% of GDP as it did in each year between 2005 and
2008.
Current account surplus to remain elevated in
2011-12
0.0
30.0
0
600
(SR,
bn)
(YoY%change)
Source: SAMA, Banque Saudi Fransi forecasts
As % of GDPCurrent account balance
20042003200220012000 2005 2007 2010e2009 2012f2011f2006 2008
5.0
10.0
15.0
20.0
25.0
100
200
300
400
500
0.0
10.0
(YoY%c
hange)
Private sector in focus after government steered 2010 growth
2012f2011f2010e20092008200720062005200420032002
2.0
4.0
6.0
8.0
Real GDP Private sector Government sectorSource: SAMA, Banque Saudi Fransi forecasts
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Electricity, gas and water
The electricity, gas and water sector has continued to sus-tain economic growth of upwards of 6% throughout thefinancial crisis due to a government commitment to buildpower generation and water desalination capacity. Expan-sion at constant prices was 6% for the sector in 2010, thefastest rate of growth for any sector, and we except thegrowth rate will rise to 6.2% this year.
High annual population growth rates and the escalation ofindustrial production have led to a rise in domestic demand
for utilities of about 8% per year in recent years, and growthshould resume at 7.6% per year through to 2032.
Peak power demand jumped 85% in 1999-2008 andthe kingdoms power demand could grow to more than120,000 megawatts by 2032 from capacity of about 50,000MW now. In the fourth quarter, the new Riyadh PP10 powerplant should come on-stream, its first phase totalling 799MW poised to enter commercial operation in mid-2012,adding a further 941 MW by mid-2013. Available water percapita, meanwhile, dwindled by almost a quarter in the pastdecade, which has necessitated a push to boost water de-salination capacity.
We estimate public and private sectors will need to investSR1 trillion to build capacity in power and water through2032 just to keep up with demand. Measures to curtailoveruse are therefore crucial. In July 2010, SEC raised tar-iffs for commercial and industrial users by 9.6%, while ex-cluding residential users from the change. The company isstill selling electricity 3.5% below production cost. Similarfee adjustments can be expected in the future as the state
seeks to rationalise the use of power, water and fuel do-mestically.
Transport, storage and communications
The transport and communications sector is likely grow5.9% this year, having been the second-fastest-growingprivate sector last year, at 5.6%.
The telecoms sector has expanded quickly in recent yearswith the introduction of two mobile phone operators to
compete with the incumbent Saudi Telecom. Home to morethan 27 million people, the Saudi market offers the great-est subscriber potential in the Gulf region, in addition totremendous roaming revenues generated in relation to themillions of people who visit the kingdom to perform the hajjpilgrimage or lesser umrah pilgrimage.
Third operator, Zain Saudi Arabia, widened its network cov-erage last year and built its customer base to more than8 million, about 2 million more than it had a year earlier.Etihad Etisalat (Mobily), the second operator, also posted arecord profit in Q3, up 41% on the year, while incumbentSaudi Telecoms Q3 profit also surpassed expectations.
Transport projects have, meanwhile, been a top priority forthe government, which allocated SR25.2 billion of its 2011budget to transport and telecommunications investments,up 5% from 2010 allocations. The plan includes a strategyto lay down 6,600 kilometres of new roads, build four newairports and rebuild the King Abdulaziz International Airport.
-6
18
(YoY%c
hange)
Inflation remains historically high, but pressures ease
2012f20102008200620042002200019981996199419921990
Inflation rate Rental and utilities index Food indexSource: CDSI, Banque Saudi Fransi forecasts
-4
-2
0
2
4
6
8
10
12
14
16
-
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Saudi Arabia further plans to increase its grains storage ca-pacity by 550,000 metric tonnes within three years to guardagainst price rises. Presently maintaining stock of 1.4 mil-lion tonnes, the kingdom would add capacity at ports in theKing Abdullah Economic City, Yanbu and Dhiba under thisscheme.
Agriculture
Agriculture GDP is likely to grow 0.7% in 2011 accordingto our estimates, compared with about 0.5% last year. The
kingdom continues to be a sizeable producer of foodstuffs,but the agriculture sector has not grown as swiftly as itused to due to a state policy to phase out certain water-intensive agricultural production, such as wheat. As SaudiArabia moves toward importing key commodities includingwheat, the agriculture sectors GDP will continue to growonly marginally and possible contract.
Community, social and personal services
This sectors growth is likely to rise to 4.3% in 2011 from anestimated 3.8% last year, according to our forecasts. Healthand social affairs is a crucial policy focus for the govern-ment, which raised its allocation for these areas of spendingby 12% in the 2011 budget to SR68.7 billion. The fundingwould go toward building new hospitals and primary carecentres in addition to financing various socially relevant ac-tivities, such as funding poverty reduction programmes andbuilding sporting clubs and social welfare offices.
Saudi Arabias services industry also derives benefits fromreligious tourism. Last years hajj pilgrimage attracted arecord number of pilgrims. Some 2.79 million people per-formed hajj, up 20.6% from the year earlier, including 1.8million non-Saudi residents, according to CDSI data.
Inflation
Inflationary pressures continue to stem from domestic trig-gers, including rent and higher goods and services costs,and elevated global food price inflation. After hitting an
18-month high of 6.1% in August, inflation moderated andaveraged 5.4% in 2010, three percentage points above theyear earlier. Price pressures are likely to ease slightly thisyear due to comparatively lower rental inflation, althoughfood price inflation could remain elevated due to globalprice pressures.
We expect annual inflation to average 5.1% this year, his-torically high for a country that experienced average infla-tion of 0.8% between 1990 and 2006. Inflation does notpose the same degree of societal risks that it did in 2007and 2008, when it reached double digit levels for the first
time in three decades at a time when the purchasing powerwas weak due to U.S. dollar frailty. In November, the gov-ernment announced it would not phase out an inflation al-lowance that had raised salaries of state employees by 15%over the last three years in order to help them cope withrising prices, without consequently stoking inflation.
The states stimulatory spending programme has not cre-ated notable inflationary pressures in goods, services andwages because state investments have complementedthe lack of private sector investment, rather than compet-ing with it. Saudi Arabia has benefitted from excess labourand services capacity in the region, where some othereconomies faced more severe slowdowns.
Food inflation comprising almost a third of the cost of liv-ing basket is likely to hover around 6.9% in 2011. Globalprices for wheat, corn and rice rose 26% between June andNovember 2010, pushing their index to an all-time high inDecember, according to the Food and Agriculture Organi-sation (FAO). Prices of cereals, particularly wheat, rose inH2 2010 due to severe drought and fires in major wheatproducers Russia and Ukraine, while Canada was also hit
with bad weather.
Foreign assets back to pre-2009 levels
30
150
1000
1700
(SR,
bn)
(USD/bbl)
Source: SAMA, Thomson Reuters
Average oil priceSAMA net foreign assets
1100
1200
1300
1400
1500
1600
40
50
60
70
80
90
100
110
120
130
140
2 01 0 Mar Ma y J ul S ep N ov2 00 9 Mar Ma y J ul S ep No v2 00 8 Mar Ma y J ul S ep N ov
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Rice crops, a staple for Saudi consumers, are also facing
difficulties, prompting the FAO to give a less optimistic
forecast for global rice production in November than it did
in June. The FAO expects global rice trade to decline 2%
in 2011 as major exporters, including Pakistan, Cambo-
dia, Egypt and Vietnam, face supply constraints. This could
translate into higher prices domestically. Aside from global
factors, the dynamics of wholesale food production and dis-
tribution have contributed to market imbalances.
Inflation could get some downward pressure from the otherexpenses and services category, accounting for 14% of the
index. Gold and jewellery comprise a large weighting in this
basket and should undergo a corrective phase as global in-
flationary concerns subside.
Rent and utilities inflation, about a fifth of the index, should
fall to 7.8% in 2011 from 9.5% last year, continuing on a
declining trend since inflation in the index peaked at almost
20% in mid-2008. Given the markets inadequate supply,
upward revisions are plausible. In our latest business con-
fidence index, however, business executives said they ex-
pected inflation rates to decline in the coming six months.
Domestic debt
One unforeseen feature of this years budget announce-
ment was the states reduction of public debt in 2010 to
SR167 billion from SR225.1 billion a year earlier. As coun-
tries the world over grapple with rising debt-to-GDP ratios,
Saudi Arabia reduced its debt ratio to 10.2% from 16% a
year earlier. In 2003, the debt-to-GDP ratio was 82%.
The move was an attempt by the government to dem-onstrate the extent of its fiscal health even as it pursues
record budget expenditures. All Saudi government debt is
domestic, held by the two state pension funds and local
banks. We anticipate the government will continue to ser-
vice public debt this year, reducing its burden to SR145 bil-
lion, or 8.1% of GDP.
Outlook and challenges
With a strong oil price backdrop, 2011 promises to be a
positive year for the Saudi economy, one marked by solideconomic growth rates, manageable inflation and twin fis-cal and current account surpluses.
In 2012, the economy should encounter a more promisingoutcome, with real GDP growth accelerating to 4.4%, in-cluding expansion of 4.5% of the private sector as the gov-ernment sector pulls back further. Bank credit growth to theprivate sector would return to low double-digit levels androbust oil prices and greater global demand would neces-sitate a gain in crude oil production, leading to smaller butsizeable fiscal and current account surpluses amountingto 4.1% and 11.3% of GDP, respectively. We also foreseeinflationary pressures easing further in 2012, according toinitial indications. With improved lending and faster moneysupply growth rates, the central bank should be comfort-able in raising its repurchase rate by 50 basis points for thefirst time in three years.For the time being, a reluctant private sector and disinclinedbanks have placed enormous pressure on state enterprisesto mobilise funds in order to plug the financing gap. The
states aggressive spending programme has provided abackdrop for private sector momentum, but private firmshave not yet regained their place in the development pro-cess.
In this regard, a great deal needs to be done to revive thesmall and medium-sized enterprise (SME) segment, whichshould be instrumental in any economic recovery. The gov-ernment should devise strategies to encourage SMEs andenable them to become beneficiaries of public funding,which has tended to profit only a small number of very big
private sector players.
In its five-year plan, Saudi Arabia set as one of its objec-tives the need to nurture and organise the SME segmentthrough a series of state and private initiatives designed toboost the segments contribution to non-oil GDP. Withouta drastic improvement in the encouragement and integra-tion of SMEs, the private sector will struggle to exceed 5%growth in the coming years, although such growth rates arenecessary to create jobs, the most serious challenge facingthe economy today.
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Key Saudi Arabia Economic Indicators
2002 2003 2004 2005 2006 2007 2008 2009 2010e 2011f 2012f
MACRO-ECONOMIC INDICATORS
Nominal GDP (USD bn) 188.6 214.6 250.3 315.3 356.2 384.7 476.3 375.8 434.7 478.6 519.3
Nominal GDP (SR bn) 707.1 804.6 938.8 1,182.5 1,335.6 1,442.6 1,786.1 1,409.1 1,630.0 1,794.9 1,947.5
YoY % change 3.0 13.8 16.7 26.0 12.9 8.0 23.8 -21.1 15.7 10.1 8.5
Real GDP growth rate, % 0.1 7.7 5.3 5.6 3.2 2.0 4.2 0.6 3.8 4.2 4.4
Non-oil private sector real GDP growth rate, % 4.1 3.9 5.3 5.8 6.1 5.5 4.6 3.5 3.7 4.2 4.5
Government real GDP growth rate, % 2.9 3.1 3.1 4.0 3.1 3.0 3.7 4.4 5.9 5.3 4.7
Oil sector real GDP growth rate, % -7.5 17.2 6.7 6.2 -0.8 -3.6 4.2 -6.7 2.2 3.5 4.0
Inflation, YoY % change 0.2 0.6 0.3 0.7 2.2 4.1 9.9 5.1 5.4 5.1 4.8
GDP per capita (USD) 8,774 9,744 11,111 13,640 15,041 15,868 19,200 14,809 16,039 17,279 18,286
BUDGETARY INDICATORS
Total government revenue (SR bn) 213.0 293.0 392.3 564.3 673.7 642.8 1,101.0 509.8 735.0 769.0 798.3Total government expenditure (SR bn) 233.5 257.0 285.2 346.5 393.3 466.2 520.1 596.4 626.5 676.0 718.0
Deficit/surplus (SR bn) -20.5 36.0 107.1 217.9 280.4 176.6 580.9 -86.6 108.50 93.0 80.3
Budget balance, % of GDP -2.9 4.5 11.4 18.4 21.0 12.2 32.5 -6.1 6.7 5.2 4.1
Domestic debt (SR bn) 558.0 660.0 610.6 459.6 364.6 266.8 235.0 225.1 167.0 145.0 137
Domestic debt as % GDP 78.9 82.0 65.0 38.9 27.3 18.5 13.4 16.0 10.2 8.1 7.0
FOREIGN TRADE INDICATORS
Total export revenues (USD bn) 72.3 93.0 125.7 180.4 210.9 233.1 313.4 192.2 236.3 249.9 268.5
Oil export revenues (USD bn) 63.6 82.0 110.4 161.6 188.2 205.3 281.0 163.1 203.2 212.4 227.3
Total imports (USD bn) 29.6 38.3 43.5 53.8 63.0 81.5 100.6 86.4 87.0 97.4 112.0
Current account balance (USD bn) 11.9 23.3 49.3 90.0 98.9 93.3 132.3 22.8 69.6 63.1 58.8
Current account as % of GDP 6.3 10.8 19.7 28.5 27.8 24.3 27.8 6.1 16.0 13.2 11.3
EXCHANGE RATE (=USD1)
Saudi riyal 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75
BANKING INDICATORS
Bank claims on private sector, year-end % change 10.0 11.0 37.4 38.9 9.2 21.4 27.1 -0.04 6.6 9.1 11.1
Total private credit, year-end % change 12.4 11.3 37.0 38.9 9.8 20.6 27.9 -0.6 7.3 8.8 10.2
Total bank credit, year-end % change 12.3 17.2 34.5 36.2 9.8 19.7 25.2 -1.1 8.4 8.6 9.5
Broad money M3, YoY % change 14.7 6.9 18.8 11.6 19.3 19.6 17.6 10.7 5.0 9.7 10.4
SAMA net foreign assets (USD bn) 41.9 59.5 86.4 150.3 221.1 300.9 437.9 405.3 438.0 470.8 499.1
Repurchase Rate (year-end) 2.00 1.75 2.50 4.75 5.20 5.50 2.50 2.00 2.00 2.00 2.50
SAVING & INVESTMENT INDICATORS
Gross fixed capital formation, % of GDP 18.1 18.4 16.7 16.5 17.5 20.5 19.5 24.7 23.9 24.8 26.5
Non-oil government investments, % of GDP 2.6 2.9 3.2 4.6 4.4 5.8 6.2 8.5 8.7 8.6 8.4
Non-oil private investments, % of GDP 13.8 12.9 11.6 10.0 9.7 10.1 9.6 11.9 11.0 10.9 10.7
Gross domestic savings, % of GDP 37.1 41.8 45.9 51.3 50.1 48.5 52.8 37.1 41.8 42.3 40.9
Government savings, % of GDP -0.9 6.0 14.0 23.6 26.2 20.5 40.7 6.6 12.1 16.5 17.8
Private savings, % of GDP 38.0 35.8 31.9 27.7 23.9 28.0 12.1 30.5 27.6 23.5 24.3
DEMOGRAPHIC INDICATORS
Population (in millions) 21.5 22.0 22.5 23.1 23.7 24.2 24.8 25.4 27.1 27.7 28.4
Non-Saudi 5.8 6.0 6.1 6.3 6.4 6.6 6.7 6.8 8.4 8.6 8.9
Unemployment rate (%) Saudi 9.7 10.4 11.0 11.5 12.0 11.0 9.8 10.5 10.5 10.7 10.9
Non-Saudi 0.8 0.8 0.8 0.8 0.8 0.4 0.4 0.3 0.4 0.4 0.3
OIL INDICATORS
Argus Sour Crude Index (ASCI) 59.4 66.4 93.8 60.4 76.0 79.4 82.1
Average oil price (WTI) (USD/barrel) 26.3 31.3 41.3 56.6 66.1 72.3 100.2 62.1 79.0 82.5 85
Average Saudi oil price (USD/barrel) 23.4 26.8 34.5 49.5 60.5 68.1 93.4 61.4 76.0 79.0 81
Crude oil production (million bpd) 7.09 8.41 8.90 9.35 9.21 8.82 9.20 8.18 8.19 8.48 8.75
STOCK MARKET INDICATORS Nov. 2010 Dec. 2010
Tadawul Stock Index (TASI) (period-end) 2,518.1 4,437.6 8,206.6 16,712.6 7,933.3 11,038.7 4,803.0 6,121.8 6,310.0 6,620.8
Source: Saudi Arabian Monetary Agency, other Saudi Arabian government authorities, Banque Saudi Fransi forecasts
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Disclosure appendix
Analyst certification
The analyst(s), who is primarily responsible for this report, certifies that the opinion(s) on the subject security(ies) or issuer(s)and any other views or forecasts expressed herein accurately reflect their personal views and that no part of their compensation,was, is or will be directly related to the specific recommendations or views contained in this research report.
This report is designed for, and should only be utilised by, institutional investors. Furthermore, Banque Saudi Fransi believes an
investor,s decision to make an investment should depend on individual circumstances such as the investor
,s existing holdings
and other considerations.
Additional disclosures
1 - This report is dated as at 25 January 2011.
2 - All market data included in this report are dated as at close 24 January 2011, unless otherwise indicated in this report.
3 - Banque Saudi Fransi has procedures to identify and manage any potential conflicts of interest that arise in connection withits Research business. A Chinese Wall is in place between the Investment Banking and Research businesses to ensure thatany confidential and/or price-sensitive information is handled in an appropriate manner.
Disclaimer
This report is prepared for information only. Where the information contained in this report is obtained from outside sources,Banque Saudi Fransi believes that information to be reliable. However, Banque Saudi Fransi does not guarantee its completenessor accuracy. The opinions expressed are subject to change without notice and Banque Saudi Fransi expressly disclaims anyand all liability for the information contained in this report.
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person have not been taken into consideration. Accordingly, you should not rely on the report as investment advice. NeitherBanque Saudi Fransi nor any of its affiliates, their directors, officers and employees will be liable or have any responsibility ofany kind for any loss or damage that may be incurred as a result of the information contained in this report.