Saudi Arabian economy Size of the economy revised up

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1 Md. Rahmatullah Khan, Economic analyst Tel: , khanmr@alrajhi-capital.com Saudi Arabian economy Saudi Arabian economy Size of the economy revised up The recent upward revisions of size of GDP and growth of GDP in 2010 and 2011 by Central Department of Statistics and Information reflect wider base of non-oil sector in Saudi Arabia. The revisions reflect higher growth in the recent years compared to earlier estimates. The share of non-oil sector in nominal GDP has been revised upward in both years by around 7% which is significant. Rising share of the sector provides long term stability in the economic growth as growth in the sector is significantly less volatile compared to growth in the oil sector. Higher level of nominal GDP will translate into many important macroeconomic ratios such as debt to GDP, market cap to GDP etc lower. In the wake of higher than expected government spending last year, we revise our forecast for the same to SAR904bn in 2013 and SAR967bn in Moreover, in the current scenario, monetary and credit indicators are supportive to economic activities as credit growth has been in accelerating mode. Real economic indicators: The Central Department of Statistics and Information (CDSI) has revised up GDP data since The nominal GDP has been revised significantly upward for the year 2010 and The upward revision has happened mainly due to significant revision in the non-oil sector component of the GDP as reflected through lower oil sector share in the nominal GDP. After the revisions, oil sector share has come down from 52% to 44.6% for 2010 and from 57% to 51% for Based on the new estimates for the year 2011, nominal GDP has been estimated at SAR2727bn for We expect it to reach close to SAR3 trillion in Government expenditure was higher than our expectation in 2012 which led us to revise our forecasts for the year 2013 and Moreover, we expect that government will be able to maintain the current level of expenditure supported by high foreign reserve assets and one of the lowest public debt ratios to GDP in the world. Monetary and credit indicators: Monetary and credit indicators remain supportive to economic growth. Broader money supply growth has been stable at around 11% for the last few months except in October when there was a spike. Credit growth continues to grow steadily which has crossed 1 YoY in November. However, deposit growth has been lagging behind since early Reflecting strong external account, foreign reserve assets continued to grow to reach SAR2411bn in November. Table 1. Macroeconomic Indicators for Saudi Arabia E 2013F 2014F Real GDP ( growth) 4.7% % 3.3% 4. Nominal GDP (SAR billion) Inflation (monthly average) 5.3% % 4% Revenue (SAR billion) Expenditure (SAR billion) Fiscal Balance (SAR billion) Trade balance (SAR billion) Current account (SAR billion) Current account (% of GDP) 12.6% 23.6% % 10.9% Disclosures Please refer to the important disclosures at the back of this report. 1

2 Real economic indicators Figure 1 Significant revisions in Nominal GDP SAR bn F 2014F Nominal GDP-previous Nominal GDP-revised The upward revision in recent growth rates is largely due to stronger non-oil sector growth estimates Nominal GDP is expected to reach close to SAR3 trillion in 2014 Economy expanded faster than earlier estimated The Central Department of Statistics and Information (CDSI) has revised up GDP growth figures for the year 2010 and The real GDP growth for the year 2010 has been revised from 4.6% to 4.7 whereas it has been revised up significantly from 7.1% to 8. for the year Preliminary estimate from the department shows that the real GDP growth was 6.8% in The full year growth estimate suggests that there is upward revision in quarterly growth rates released earlier. The quarterly real GDP growth as released by the department was 5.9%, 5. and 5.9% for Q1, Q2 and Q3 of 2012 respectively which averages around 5.8%. If the full year growth has been estimated at 6.8%, this is possible under two situations either growth in the final quarter has been estimated at 9.9% or growth in the previous three quarters have been revised up. The first possibility of such as high growth is unlikely as oil sector seems to have moderated significantly. According to OPEC data, the average crude production in Saudi Arabia was slightly lower in Q than Q Note that the growth rate for 2012 is an estimate which is likely to be revised later in the year. On the nominal basis, Saudi Arabian economy has been estimated to reach SAR2727bn in 2012, higher by 8.6% compared to Nominal GDP has been revised up from SAR1690bn to SAR1975bn for the year 2010 and from SAR2163bn to SAR2511bn for the year The upward revision has mainly happened due to significant revision in non-oil sector component of the GDP as reflected through lower oil sector share in the nominal GDP. After the revisions, oil sector share has come down from 52% to 44.6% for 2010 and from 57% to 51% for The upward revisions suggest that not only economic growth was higher in the last three years but also quality of growth was better as it largely came from the non-oil sector. In the wake of significant upward revisions in the nominal GDP, we also revise up our expectations for the current year as well as for the next year keeping growth rates unchanged. We expect nominal GDP to reach SAR2763bn in 2013 and SAR2995bn in In terms of real growth we continue with our earlier forecasts where we expect real GDP to grow 3.3% and 4. in 2013 and 2014 respectively. (Please refer to Saudi Economic monthly November 2012 for details of the forecast.) Figure 2 Decline in crude production was sharper USD per barrel WTI Brent mbpd Arab Lights KSA production-rhs Government expenditure has been higher than budgeted in the last many years Domestic crude production and global price Amid upward revisions in past economic growth data, crude production has been easing in the past few months as expected. However, the moderation was rather sharp in the last two months as crude production declined by almost 0.7 million barrel per day (mbpd) since October to mbpd in December. Thus average crude production in the last quarter was 9.4 mbpd compared to 9.6mbpd in Q This suggests contraction in the oil sector in Q4 last year compared to a year ago. Global crude prices moved largely in a range bound manner over the last two months. Average Brent crude price was around US$109 per barrel both in November and December, slightly lower compared to US$111.5 per barrel in October. Although we continue to believe that crude price is likely to ease slightly over the current year due to sharp jump in supply especially from the US, recent strong sentiments in global economic outlook has been supporting the price. The commodity is trading near its upper side of the trading range at around US$113 per barrel (Brent price). Government expenditure higher than expected The government spending continued to rise in 2012 as against our expectation as well as market consensus of a small decline compared to Government spending had sharply jumped in 2011 due to many one-time items in spending side such as two month bonus to all government employees, we had expected slightly lower government expenditure in However, total spending by the government increased from SAR804bn in 2011 to SAR853bn in 2012, an increase of 6%. This suggests that the government spending is likely to continue at modest pace in the medium term without any break. The government has budgeted SAR820bn expenditure and SAR829bn revenue in the current year. However, actual revenue and Disclosures Please refer to the important disclosures at the back of this report. 2

3 Table 2 Government budget (SAR bn) 2007 Figure 3 Govt spending has not declined since Budgeted Actual Rev Exp Rev Exp % % % % % Govt expenditure Actual expenditure compared to budgeted Govt revenue expenditure have been higher than ones budgeted by the government in recent years. The average extra spending by the government has been around one-fourth of budgeted spending except in 2011 when the extra spending was 39%. The spending is likely to be higher in 2013 as well and we expect it to increase to SAR904bn. Sharply rising spending one the one hand has been supporting non-oil economy especially after the financial crisis but on the other hand it is raising a concern about the sustainability of the spending. Looking at the longer history of government revenue and expenditure provides us an insight that sustained decline in government revenue has been followed by cut in spending. The sharp correction in the oil prices in early 1980s which resulted into lower government revenue was followed by cuts in spending as well. Similar was the case when oil prices remained stable but at lower levels which did not generate sufficient resources. Government spending growth closely followed revenue growth. However, the last decade has been different compared to 1980s and 1990s in terms of spending. The spending has never declined since 2002 even as revenue growth has been volatile and 2007 and 2009 witnessed a decline in revenue. The primary reason for the same seems to be decent budget surplus during the last decade starting 2003 except A sustained budget surplus also helped government to reduce public debt drastically from around 10 of GDP at the start of the decade to currently around 3.6% of GDP. In absolute terms public debt is estimated at SAR98.8bn (US$26.3bn) at the end of Moreover, official foreign assets have increased almost five-fold since 2005 to SAR2411bn at the end of November The total foreign reserves are almost 9 of GDP which provides a solid support to the domestic and external balance sheet of the country. These factors put government finances on stronger footing which differentiates the current circumstances from the circumstances in 1980s and 1990s. The strength in these macroeconomic variables provides us confidence that the government spending will be strong in the medium term and beyond. In the line with our expectation of growing spending we have revised up our government spending forecast to SAR904bn from an earlier forecast of SAR810bn in We also revised up our forecast for the year 2014 to SAR967bn. Figure 4 Inflation remains below 4% Source:CDSI, Al Rajhi Capital Inflation Inflation Inflation in December was 3.9%, a tad above 3.8% level in the previous month. It has remained below 4% since August last year as major constituents in the index have witnessed moderation. Price rise in rent, fuel and water component has eased substantially from above 9% at the start of 2012 to 6.3% at the end of the year. Notable decline has been witnessed in other expenses and services which has come down from 8.1% to 0.9% during the year. Other components of the inflation index which have witnessed moderation are transport and telecommunication and education and entertainment. On the other hand, a major component food and beverage and couple of smaller components such as home furniture and fabric clothing and footwear have moved up during the year. Price rise in food and beverages was 5.1% in December 2012 compared to 3.9% in January last year. The average inflation was 4. in 2012 compared to in The moderation in average inflation last year happened mainly on account of decline in food inflation and other expenses and services inflation. Average food inflation was lower by 0.8% in last year compared to Average price rise in other expenses and services witnessed sharp easing by almost during the period. On the other hand, although price rise in rent, fuel and water has eased in the second half of 2012, average rise was higher by 0.3% last year compared to Disclosures Please refer to the important disclosures at the back of this report. 3

4 Monetary and credit indicators Figure 5 Money supply growth remains stable Year-on-Year M1 M2 M3 Money supply Money supply growth eased again in November after a month of spike in October due to sudden growth in bank deposits. M1 growth decelerated from 15.2% YoY in October to 12.4% YoY in November last year. The deceleration was mainly on account of slower growth in demand deposits. The deposits grew 12.7% YoY in November compared to 15.8% YoY in the previous month. On a monthly basis, M1 declined 1.1% in November compared to 2.9% increase in the previous month. M2 growth decelerated even faster as Time and Savings deposits also grew at slower rate. Growth in M2 was 11. YoY in November compared to 15.2% YoY in October as the deposits grew at 9.3% YoY November lower than 15.9% YoY in October. Softening in M1 and M2 growth rates resulted into slower growth of M3. The broader measure of money supply grew 11.4% YoY in November compared to 13% YoY in the previous month. Figure 6 Credit growth outpaces deposits growth Year-on-Year Credit and deposit growth Credit growth from commercial banks remained on accelerating mode as loans, advances and overdrafts increased 15.4% YoY in November, a tad higher than 15.3% YoY in October. The total loans outstanding reached to SAR941bn whereas private sector bill discounted was SAR8.857bn at the end of November. Investment in private securities was SAR37.6bn at the end of the month. On monthly basis, loans, advances and overdrafts inched up 0.7% whereas commercial banks total claims on private sector moved up by 0.8% in November. Private sector bills discounted moved up by 0.4% whereas investment in private securities moved up by 2.. Rising credit growth is reflection of strong confidence in Saudi non-oil economy. Loans advances and overdrafts Deposits growth On the other side, deposits growth has been lagging behind credit growth. Demand deposits grew 12.7% YoY whereas times and savings deposits increased 9.3% YoY in November. Total deposits grew by 11. YoY, almost 4% slower than credit growth. Note that credit growth has outpaced deposits growth in every month of the last year. Figure 4 Foreign reserve assets reach SAR2411bn 2,500 2,300 2,100 1,900 1,700 1,500 SAR billion YoY Reserve Assets of SAMA Foreign reserve assets of Saudi Arabian Monetary Agency remained on uptrend as a reflection of surplus in external balance. Total foreign assets reached SAR2411bn at the end of November 2012, a rise of 20.9% YoY. In absolute terms, the reserve increased by SAR382bn in the first eleven months of the last year. Slightly more than 6 of the additional reserves have been invested in foreign securities whereas remaining portion has been added to foreign currency and deposits abroad. Overall, around 68.8% of the total reserves are invested into foreign securities whereas 28.7% are kept as foreign currency and deposits abroad. SDR constitutes 1. of the total reserves whereas 0.9% has been kept as reserve position in the IMF. Total foreign reserve assets Growth in foreign reserve assets-rhs Disclosures Please refer to the important disclosures at the back of this report. 4

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