March 215 A&T Bank View: We expect Saudi Arabia economy to continue remain robust and grow by 4.5% and 3.8% in 215 and 216 respectively. We estimate the economy grew 4.45% in 214. We do not expect falling oil prices to disrupt economic activity as Saudi Arabia would likely to continue growing with the help of non-oil sectors as the country aims to diversify economy from oil dependency and increase investments in non-oil sectors. According to our core view, the medium-term outlook is expected to depend on the government s ability to invest in highquality projects in order to decrease the effects of falling oil receipts. We expect the government to continue applying loose fiscal policy despite diminishing revenues, in reliance upon its fiscal buffers. If the government cuts spending and capital expenditures in order to balance the budget, it would dampen business and consumer confidence and cause economic activity to slow down, as the country needs to compensate the losses it has been facing, with non-oil sector production. Should the government be successful with its investment projects to diversify economic activity, there would likely be significant productivity gains, which would result in increasing private consumption. Our core view sees fixed investment and private consumption as the main drivers for economic growth for the longer term. Figure 1: A&T Bank Forecasts Indicator Name 212 213 214 215f 216f Nominal GDP, USDbn 733,8 745,2 78,7 84,5 833,6 Real GDP growth, % y-o-y 5,8 4, 4,45 4,5 3,8 Consumer price inflation, % y-o-y, ave 4,5 3,3 2,7 3,3 3,7 Current account balance, % of GDP 22,5 18, 16-3,7-1,2 Budget balance, % of GDP 13,6 6,5 4,15-12,1-8,8 Reserves in months of imports 36,6 38 36,75 35,45 33,45 Blue are not realized. f: A&T Bank Research forecast. Source: A&T Bank, BMI, IMF Figure 2: Upside and Downside Risks to Forecast Risk UPSIDE Polit. / Soc. Economic Implication of 'Saudisation' policy, lowering unemployment rate, causing higher incomes Increasing female labor participation rate Diversification of economic activity from oil dependency Approval of mortgage lending and increasing pace of investment in construction, supporting growth Private and government investments in infrastructure segments DOWNSIDE Political / Social Economic Being a target for jihadist groups and possible terrorist attacks The effect of possible terrorist attacks on oil pipelines in Eastern part, hitting oil production Curbing oil production, weighing down GDP growth A sustained decline in oil prices Slowdown in China and Euro Area, key trading partners 1
Macroeconomic Dynamics Saudi Arabian economy has grown very strongly in recent years but slowed down slightly in 213 due to decline in oil output. After gradual gradual recovery in 214, we expect the economy continue growing in 215 and 216 with growth rates of 4.5% and 3.8% respectively, insulated from the recent decline in oil prices. The government is expected to continue following loose fiscal policy -as explained in detail in the next section- and support economic activity by increasing investment in non-oil sectors such as infrastructure, utilities, education, health and housing despite falling oil revenues. Diversification would be the key priority for the government in order to erase the negative effects of oil dependent sectors. Quality of investment would be another key issue for the country s economy. The leading indicators such as HSBC/Markit PMI, the NCB Business Optimism Index (BOI) and surveys of National Commercial show that confidence of both consumer and real sector is robust and suggest strong growth in near-term. Therefore, we believe private investment would be robust combined with government spending and support diversification efforts. We see private consumption as one of the main triggers for the medium/ longer-term growth, combined with and supported by fixed investment. Saudisation programme which aims to replace nationals with foreign workers would cause rising disposable incomes and bolster consumption. Moreover, increasing number of females who participate in the workforce lifts household purchasing power (Female labor participation rate rose to 16.4% in 213 from 12.6% in 26). Therefore, we see retail sales to benefit over those developments in near future. Figure 3: Components of GDP (213) & Real GDP Growth 5% 3% 2% Mining 19% 32% 39% Finance Trade & Tourism & Services Construction Manufacturing 1 8 6 4 2 1 8 6 4 2 29 21 211 212 213 214 215f 216f Nominal GDP, USDbn Real GDP growth, % y-o-y f: A&T Bank Research forecast. Source: A&T Bank, BMI, IMF Policy Implications Lower oil prices, that fell below country s breakeven level for fiscal budget, has been hitting fiscal and current account balances as crude exports accounts for almost %83 of the total exports and 9% of budget revenue. OPEC members met in last November and decided not to cut production in order to pull back the prices from record lows, with Saudi Arabia announcing they can deal with very low prices. In terms of fiscal budget, we do not see current situation as worrying since Saudi Arabia is one of the countries that has capacity to absorb the effects of lower oil prices depending on its fiscal buffers. The country had reserves that cover 38 months of imports in 213. Furthermore, although the country s revenues have been declining, the country would not choose to cut spending while it needs to diversify economic activity from oil dependency. Therefore, Saudi Arabia would likely to focus on the state-led developments in non-oil segments. The government would likely make extensive investment plans especially in infrastructure segments in order not to undermine business and consumer confidence during a period in which oil dependent economies suffer. Finally, we believe the government would not cut spending for public sector wage bills and subsidies due to political considerations. We estimate budget balance to realize as 4.15% in 214. We have downgraded our forecast for the country s budget balance for 215 and added our estimate for 216. We expect the balance to turn into deficit in 215 and forecast -12,1% and -8.8% deficits in 215 and 216 respectively due to governments inability to cut spending while revenues have been diminishing hurt by falling oil prices. 2
We have downgraded our forecast for current account balance too. We estimate the balance to realize as 16% in 214. However, we forecast current account surplus to turn into deficit and realize as -3.7% and -1.2% in 215 and 216 from. This is the result of narrowing trade surplus as we expect exports to remain almost stable hurt by decreasing oil export receipts and weakening demand from China and Euro Area (key importers) for non-oil products while import growth remains strong supported by state-led economic activity. Furthermore, oil production would likely to be directed to domestic consumption rather than exports in order to meet growing energy needs of the country. Saudi Arabia s inflation was in check and realized as 2.7% in 214. We expect consumer inflation to increase modestly in 215 to 3.3%. We see rental prices as the main driver for inflation as the mortgage law that passed in 212 combined with the country s needs for affordable housing would push up the prices. Although food prices eased in 214 in line with international food prices, wheat prices would be another reason for picking up inflation in 215. We expect strong US dollar (to which the Saudi riyal is pegged) to limit inflation pressures by controlling imported inflation and Saudisation programme to limit inflation pressures as more costly foreign workers have been replaced with nationals. The Banking System Saudi Arabian banks are liquid, well capitalized and profitable. Although average pre-tax return ratios have been declining in recent years, bank profitability is still high. NPL s have continued to decline with regulatory capital to risk weighted assets was at around 17.95% in 213. Even though credit to private sector has been decreasing in recent years, we expect lending demand to stay strong supported by the diversification efforts and developments in non-oil economy, continued loose fiscal policy and related investment projects and domestic consumption. Furthermore, real estate lending would likely to grow following the mortgage law that was accepted in July 212 and recent developments in construction and real estate sectors. Since banking sector is underdeveloped especially mortgage and SME lending segment- we see current level of low penetration as an opportunity for expansion combined with country s changing demographics and economic spare capacity. Finally, we see Saudi banks as well positioned against FED tightening and higher interest rates. Since banking system is liquid enough to reduce the pass-through of high interest rates to lending and deposit rates, we expect the impact on the real economy to be smoother. Figure 4: Financial Soundness Indicators (In percent) 5 4 3 2 1 28 29 21 211 212 213 6 5 4 3 2 1 Regulatory capital to risk weighted assets Gross NPL to total net loans, rhs Credit to private sector (% of GDP) Average pretax return on assets,rhs Source: Saudi Arabian Monetary Agency 3
Foreign Trade Saudi Arabian export basket is not all diversified as approximately 83% of its exports were connected to the fuels and mining products in 213. Although the basket of countries that Saudi Arabia exports is well diversified, share of China and Euro Area and downbeat expectations in those economies would be a factor that would drag down external demand for non-oil products. Moreover, oil exports would likely be limited in coming years, as production would be directed to domestic consumption. In terms of imports, we expect a gradual increase as domestic consumption picks up and need for construction materials rises as investment projects in infrastructure segments continues. The other major export partners in addition to European Union and China were UAE (1.7%) and Singapore (.9%) in 213; whereas the three major import partners of Saudi Arabia were EU (24.6%), United States (12.3%) and China (12.8%). Figure 5: Saudi Arabia Foreign Trade at a glance Merchandise Trade Value Annual Percentage Changes 213 25-213 212 213 Merchandise exports, f.o.b. (million US$) 375.933 1 6-3 Merchandise imports, c.i.f. (million US$) 168.181 14 18 8 213 213 Share in world total exports 2, Share in world total imports,89 By main commodity group By main commodity group Agricultural products 1,3 Agricultural products 15,1 Fuels and mining products 83,6 Fuels and mining products 5,4 Manufactures 15 Manufactures 76,5 By main destinations By main origin 1. China 2, 1. European Union 24,6 2.United Arab Emirates 1,7 2.United States 12,3 3.European Union 1,6 3.China 12,8 4.Singapore,9 4. Korea, Republic of 5,8 5.India,7 5. Japan 5,7 Commercial Services Trade Value Annual Percentage Changes 213 25-213 212 213 Merchandise exports, f.o.b. (million US$) 11.147 - -5 5 Merchandise imports, c.i.f. (million US$) 51.678 - -9 4 213 213 Share in world total exports,24 Share in world total imports 1,18 By principal services item By principal services item Transportation 22,5 Transportation 37,1 Travel 68,6 Travel 34,2 Other commercial services 8,9 Other commercial services 28,7 Source: WTO 4
Turkey & Saudi Arabia: Trade relationships with Turkey have developed in recent years with bilateral trade reached to 5.4 billion dollar in 214. Saudi Arabia imports mainly textile, food products, machinery, equipment and basic metals from Turkey while main export item is chemicals and chemical products. Trade balance is in favor of Turkey. Although the relationship between two economies has developed since 22 and trade between two countries picked up especially after 24 and reached to more than four times higher levels in 214, exports from Turkey is still under potential with Turkey having only.2% share in total Saudi Arabia imports. Figure 6: Most exported goods & total exports to Turkey Thousand $ 21 211 212 213 214 Manufacture Of Plastics And Synthetic Rubber In Primary Forms 1.79.887 1.397.922 1.629.337 1.591.928 1.72.744 Manufacture Of Basic Chemicals 216.24 395.515 314.384 289.618 41.822 Manufacture Of Basic Precious And Other Non- Ferrous Metals 2,16 15.857 442 2.357 83.946 Manufacture Of Refined Petroleum Products 26.424 86.216 128.433 837 4.35 Manufacture Of Fertilizers And Nitrogen Compounds 126 26.86 18.151 27.32 26.133 Total 1.38.61 2.1.529 2.171.43 2.14.87 2.343.144 Figure 7: Most imported goods & total imports from Turkey Imports from Turkey (Thousand $) 21 211 212 213 214 Manufacture Of Carpets And Rugs 151.384 244.917 332.3 321.147 37.315 Manufacture Of Wearing Apparel Except Fur Apparel 66.132 124.521 174.753 21.619 227.847 Manufacture Of Basic Iron And Steel 815.358 788.433 1.399.646 741.291 216.262 Manufacture Of Refined Petroleum Products 29.924 76.975 89.95 21.719 197.141 Manufacture Of Electric Motors Generators Transformers And Electricity Distribution And Control Apparatus 16.912 159.52 129.84 3.321 19.81 Total 2.217.646 2.763.476 3.676.612 3.191.482 3.48.131 Source: A&T Bank Research, TurkStat 5
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