econ bfg 17feb13 saudijapan business council

8/14/2019 Econ Bfg 17Feb13 SaudiJapan Business Council

1/19

1

Saudi Arabias Economic Outlook

Presented to Saudi Arabia Japan Business CouncilFebruary 17, 2013

Fahad Alturki, PhDSenior Economist and head of research


2/19

Global economic outlook

2

Despite recent improvements in economic conditions and in market sentiment, the global economy

is still struggling to recover from the deep financial crisis.The Eurozone economy is expected to be flat this year, but risks are to the downside.

Recent measures on banking supervision, greater fiscal integration and accommodativemonetary policy are the positive factors, though progress is a concern.

The US economy is likely to see a stronger recovery following the partial fiscal cliff agreement andthe on going improvements in the labor market.

Further fiscal contraction, debt ceiling and long term fiscal sustainability are the main concerns.

There is a persistent divergence between weak performance in advanced economies and firmperformance in emerging economies.

2007 2008 2009 2010 2011 2012 E 2013 F 2014 F

World 5.4 2.8 -0.6 5.1 3.9 3.2 3.5 4.1US 1.9 -0.3 -3.1 2.4 1.8 2.3 2.0 3.0Japan 2.2 -1.0 -5.5 4.5 -0.6 2.0 1.2 0.7EuroZone 3.0 0.4 -4.4 2.0 1.4 -0.4 -0.2 1.0UK 3.6 -1.0 -4.0 1.8 0.9 -0.2 1.0 1.9China 14.2 9.6 9.2 10.4 9.3 7.8 8.2 8.5Emerging Markets 8.7 6.1 2.7 7.4 6.3 5.2 5.5 5.9Middle East 5.7 4.5 2.6 5.0 3.5 5.2 3.4 3.9Source: IMF and Jadw a Investment


3/19

Two-speed global economy

3

Emerging markets are growing at a faster rate and have more policy space

Advanced economies are facing more difficult initial conditions

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.08.0

9.0

E u

r o a r e a

S w

e d e n

J a p a n U K

S w

i t z

e r l a n d U S

C a n a d a

N o r w a y

A u

s t r a l i a

P o l a n d

S .

A f r i c a

B r a z i

l

K o r e a

R u

s s i a

M e x i

c o

T u

r k e y

C h i l e

I n d o n e s i a

I n d i a

C h i n a

Real GDP (2013, % y/y)

Advanced Economies Emerging Markets

0

1

2

3

4

5

6

78

J a p a n

U S

S w i t z e r l a n d

U K

E C B

S w e d e n

C a n a d a

N o r w a y

N e w Z e a l a n d

A u s t r a l i a

K o r e a

P o l a n d

M e x i c o

S .

A f r i c a

C h

i l e

R u s s i a

T u r k

e y

I n d o n e s i a

C h i n a

B r a z i l

I n d i a

Current central bank rates

Advanced Economies Emerging Markets

-9.0

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

2009 2010 2011 2012 F 2013 F 2014 F

Advanced Economies

Emergning Markets

Government balance (% of GDP)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011 2012 F 2013 F 2014 F

Emergning Markets

Advanced Economies

Current account balance (% of GDP)


4/19

Saudi economic outlook: sailing though

4

The Saudi economic growth is among the highest compared to G20 countries.

Positive growth outlook for 2013-14 is supported by (i) high government spending, (ii) robustdomestic consumption and (iii) supportive credit to private sector.

High oil revenues levels will boost business and investor confidence, but major risk to thisscenario is a global growth meltdown that bring a sustainable decline in oil prices.

Real GDP Growth will slow in 2013 as real oil GDP contracts

-8

-6

-4

-2

0

2

4

6

8

10

12

2004 2006 2008 2010 2012 E 2014 F

Real GDP

Real oil GDP

Real non-oil GDP

( p e r c e n

t )

-4

-2

0

2

4

6

8

10

1998 2000 2002 2004 2006 2008 2010 2012 E 2014 F

Saudi Arabia World Advanced economies Emerging markets

( p e r c e n

t )


5/19

Oil market: still favorable, but risk remains

5

Crude oil markets have begun 2013 with a gentle drift to the upside.

Geopolitical developments particularly in the Middle East will be a major driver for the oil marketin 2013, while subdued global economic recovery will pull prices down.

Despite gloomy economic picture in advanced economies, global demand for oil will remainpositive supported by non-OECD countries.

Oil price and geopoliticalrisk premium

Change in global oil demand(year-on-year change)

600

800

1,000

1,200

1,400

1,600

1,800

30

40

50

60

70

80

90

100

110

120

130

2009 2010 2011 2012 2013

Brent MSCI World Equity Index, RHS

Arabuprising

US/EUsanctionson Iran

( $ p e r

b a r r e

l )

-4

-3

-2

-1

0

1

2

3

4

Q4-05

Q4-06

Q4-07

Q4-08

Q4-09

Q4-10

Q4-11

Q4-12

Q4-13

Non-OECDOECDGlobal

( m i l

l i o n

b a r r e

l s p e r

d a y

)


6/19

Oil market: still favorable, but risk remains

6

US oil output has grown by 2.48mbpd over the past four years, which has been absorbed intoglobal balances and still left room for OPEC to increase.

Saudi Arabia have started cutting crude production since mid-2012 in response to rising N. America and Iraq production.

We expect Saudi oil export price to maintain USD100-105/b range at a production level of 9.6 in2013.

Change in N. America oil supply(year-on-year change)

Change in Saudi oil supply(year-on-year change)

-5

-3

-11

3

5

7

9

11

1315

-0.5

-0.3

-0.10.1

0.3

0.5

0.7

0.9

1.11.3 Mexico

CanadaU.S.N. America, RHS

( m i l l i o n

b a r r e

l s p e r

d a y

)

( p e r c e n

t )

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

( m i l l i o n

b a r r e

l s p e r

d a y

)


7/19

In the short-term: oil windfalls will maintain strong CA position

7

Positive global demand for hydrocarbon products and elevated oil prices will maintain a doubledigit currant account surplus this year.

Solid domestic performance is expected to keep imports and the invisible account deficitelevated.

CA surplus in turn allows for a significant buildup of foreign exchange reserves.

Current account balance FX reserves accumulation

0

5

10

15

20

25

30

0

20

40

60

80

100

120

140

160

180200

2003 2005 2007 2009 2011 2013 f

USD billion Percent of GDP, RHS

0

100

200

300

400

500

600

700

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

Investment in foreign securities

Deposits abroad and foreign currency

Gold, SDR and position in the IMF

( U S D b i l l i o n

)


8/19

leading to a strong sovereign balance sheet

8

Oil revenues will also keep the fiscal balance strong despite increasing spending:

Support to domestic demand and positive spillover to non-oil private sector.

Housing, construction, transport, retail and financial sectors to benefit the most.

Budget spending priorities are consistent with recent years.

Government budget Spending by sector

025

50

75

100

125

150

175

200

225

M u n

i c i p a l

S e r v i c e s

T r a n s p o r t

& c o m m s .

W a t e r , a

g &

i n f r a s

t r u c

t u r e

H e a

l t h &

s o c i a l a f

f a i r s

E d u c a

t i o n

&

m a n p o w e r

2009 2010 2011 2012 2013 f

( S R

b i l l i o n

)

-100

0

100

200

300

400

500

600

0

200

400

600

800

1,000

1,200

1,400

2003 2005 2007 2009 2011 2013 F

Revenue Expenditure Budget balance, RHS

( S R

b i l l i n o

)

( S R

b i l l i o n

)


9/19

but some LT risks remain

9

Despite rising spending, high savings and low debt mean spending is affordable, for the moment.

The long term challenges:Fiscal rigidity risk: current spending are rising by an average of 10 percent per year for 2002-12.Source of income risk: breakeven oil prices have risen from $24pb in 2012 to $67pb in 2012.

Government debt Current spending and fiscalbreakeven oil prices

0

20

40

60

80

100

120

0

100

200

300

400

500

600

700

800

1998 2001 2004 2007 2010 2013 f

Public debt % of GDP, RHS

( S R b i l l i o n

)

( p e r c e n

t o

f G D P )

0

10

20

30

40

50

60

70

80

90

100

0

100

200

300

400

500

600

700

2002 2004 2006 2008 2010 2012 E

Current spending

Fiscal breakeven oil price, RHS

( $ p e r

b a r r e

l )

( S R b i l l i o n

)


10/19

What is a fair oil price?

10

We are working...to steady the market at a fair price of $25 per barrel. Saudi Oil Minister, Ali Naimi, June 27, 2001

Everyone is looking at this price [$75 to $80 per barrel] and everyone issaying this is great. That is why I said it is almost a perfect price. Saudi Oil Minister, Ali Naimi, January 25, 2009

We want a price around $100 per barrel. A $100 per barrel price isgreat. Saudi Oil Minister, Ali Naimi, May 13, 2012


11/19

In the ST, a record high investment spending paves the way

11

High capital spending remains psychologically important for the private sector.

A record high investment spending in 2013 will maintain a solid and sustainable growth inmanufacturing, construction and transport sectors.

A capacity constraint is likely to limit the expansions of capital spending in 2013-14 compared tothe previous two years.

Government investment spending Sectoral GDP growth

0

50

100

150

200

250

300

2002 2004 2006 2008 2010 2012 E

( S R

b i l l i o n

)

Annual average growth of25 percent for 2003-13

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2012 E 2013 F

Manufacturing Construction Transport, Storage & Communication Retail


12/19

Real GDP growth by sector

12

Three categories of sectors:

Construction and transport, the main beneficiaries of government investment spending,should be the fastest growing sectors in 2012.

Consumption oriented sectors expected to do well on favorable domestic demand, risinggovernment consumption spending and recent labor market reform.

Export oriented sectors could be under pressure on the back of worsening global demand.

Real GDP growth by sector, % 2008 2009 2010 2011 2012 E 2013 F

Agriculture 0.7 -0.5 -1.0 2.2 2.6 0.5Manufacturing 6.0 1.5 6.6 13.7 7.6 5.5Electricity, gas and water 6.7 6.8 7.9 5.2 7.3 5.7Construction 1.5 0.6 7.3 9.9 10.3 7.5Wholesale & retail trade 6.5 2.5 7.7 7.3 8.3 4.5Transport & communication 12.2 7.4 6.4 13.8 10.7 6.2Finance 2.4 2.6 2.1 2.1 4.4 3.3Non-oil private sector 4.6 2.7 5.6 7.8 7.5 6.3Oil 4.2 -7.8 0.9 10.4 5.5 -1.5Government services 3.7 5.2 6.5 8.7 6.2 4.3Total 4.2 0.1 4.8 8.5 6.8 4.2


13/19

Construction sector indicators

13

Local demand for manufactured products, especially those used for construction, such as cementis likely to maintain an upward trend.

According to Middle East Economic Digest, there are projects underway or planned in theKingdom worth $783 billion; virtually all of these involve some element of construction.

New letter of credit opened for imports of building material followed the capital spendingupward trend.

Cement production and sales New letter of credits openedfor construction material

0

50

100

150

200

250

300

0

5

10

15

20

25

1999 2001 2003 2005 2007 2009 2011

Letters of credit opened for importsof building materialsCapital spending, RHS

( S R b i l l i o n

)

( S R b i l l i o n

)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2008 2009 2010 2011 2012 2013

Sales Production

( m n

t o n s

)


14/19

The banking sector is on solid footing

14

Domestic banks have comfortable liquidity position most of which driven by consecutive years ofexpansionary government budgets.

This should help banks offset any material sudden liquidity pressures due to regional and globaluncertainties.

The incremental increase in deposits reached a record high last year most of which weredeposited at the central bank.

Change in commercial bank deposits Commercial bank deposits with SAMA

020

4060

80100

120140

160180200

Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12

Excess Reserves

Statutory Reserves

( S R

b i l l i o n

)

-60

-30

0

30

60

90

120

150

180

1994 1997 2000 2003 2006 2009 2012

Demand deposits

Time & savings deposits

Other deposits

( S R

b i l l i o n

)


15/19

Bank lending to private sector will be supportive

15

Saudi banks continue to play a key role in supporting non-oil growth.

Relatively high risk aversion is easing, supported by government expenditures despite globaluncertainty.

As a result, bank profits have improved, reaching pre-crisis level in absolute value.

Lending to private sector Bank profits

0

5

10

15

20

25

30

35

40

0

20

40

60

80

100

120

140

160

1997 2000 2003 2006 2009 2012

Net new claims on private sector Claims on private sector, RHS

( S R b i l l i o n

)

( y e a r - o n - y e a r c

h a n g e

i n p e r c e n

t )

0

5

10

15

20

25

30

35

40

1997 2000 2003 2006 2009 2012

( S R b i l l i o n

)


16/19

Domestic demand is rising

16

Monthly data points to an upward trend in consumer spending, despite seasonal trend.

Retail, telecom, and financial sectors will benefit from the recent government initiativesparticularly the ongoing labor market reform.

Consumer demand for real estate has pushed personal lending to a new high.

Consumer spending Consumer lending

-4

0

48

12

16

20

24

28

32

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Other Consumer Loans, pptCars & Equipment, pptReal Estate Finance, pptConsumer Loans, % y/y

25

30

35

40

45

50

55

60

345

6789

101112

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12Point of sale transactions

Cash withdrawals from ATMs, RHS

( S R

b i l l i o n

)

( S R

b i l l i o n

)


17/19

Inflation cooled but not entirely

17

Inflation slowed to 4.5 percent in 2012 with the core rate falling at a faster rate.

Some local inflationary pressure is likely to remain as a result of the high level of consumer andgovernment spending, rising bank lending and low interest rates.

Domestic rental inflation, international food prices and weaker dollar will be the main divers ofinflation in 2013.

Inflation, per components International food prices

0

1

2

3

4

5

6

7

8

9

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Other goods & services contribution (ppt)Rent and utilities contribution in (ppt)Food, drink and tobacco contribution (ppt)General Index, % y/yCore Index (excl. food and housing/rent, % y/y)

-20

-10

0

10

20

30

40

50

60

70

Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

FAO food price index

FAO meat price index

FAO cereals price index

( P e r c e n

t )


18/19

Conclusion

18

2012 was a difficult year for the global economy. US debt ceiling, fiscal sustainability in the US

and the Euro crisis will be the focus of this year.High government spending will be the main source of economic growth in the Kingdom. Thisspending is affordable, at the moment. Other economic growth divers include:

Solid domestic demand

Higher bank lending and low interest rates.

Oil prices will remain elevated, though both prices and production will slightly fall over theremainder of the year.

Strong Saudi story and uncertain global environment means Kingdom should be attractive toforeign investors.

Short-term risks are external; the global economy and the regional political situation. Structuralproblems with the labor force, rapidly growing energy consumption and role of government arelong-term term concerns.


19/19

Saudi Arabia: Key data and forecasts

19

2006 2007 2008 2009 2010 2011 2012 E 2013 F 2014 FNominal GDP

(SR billion) 1,552 1,676 2,075 1,641 1,976 2,511 2,727 2,819 2,905($ billion) 413.9 447.0 553.3 437.7 526.8 669.5 727.3 751.6 774.5(% change) 12.9 8.0 23.8 -20.9 20.4 27.1 8.6 3.3 3.0

Real GDP (% change)Oil -0.8 -3.6 4.2 -7.8 0.9 10.4 5.5 -1.5 -1.4Non-oil private sector 6.1 5.5 4.6 2.7 5.6 7.8 7.5 6.3 5.0Non-oil government 3.1 3.0 3.7 5.2 6.5 8.7 6.2 4.3 4.0Total 3.2 2.0 4.2 0.1 4.8 8.5 6.8 4.2 3.6

Oil indicators (average )Brent ($/b) 65.4 72.7 97.6 61.9 79.6 111.1 112.0 104.0 100.2Saudi ($/b) 59.2 67.2 94.0 60.4 77.5 103.8 106.1 99.4 96.2Production (million b/d) 9.2 8.8 9.2 8.2 8.2 9.3 9.8 9.6 9.4

Budgetary indicators (SR billion)

Government revenue 674 643 1,101 510 742 1,118 1,239 1,047 990Government expenditure 393 466 520 596 654 827 853 870 859Budget balance 280 177 581 -87 88 291 386 178 131(% GDP) 18.1 10.5 28.0 -5.3 4.4 11.6 14.2 6.3 4.5Domestic debt 365 267 235 225 168 136 99 90 85(% GDP) 23.5 15.9 11.3 13.7 8.5 5.4 3.6 3.2 2.9

Monetary indicators (average )Inflation (% change) 2.3 4.1 9.9 5.1 5.4 5.0 4.5 4.3 3.8

SAMA base lending rate (%, end year) 5.20 5.50 2.50 2.00 2.00 2.00 2.00 2.00 2.00

External trade indicators ($ billion)Oil export revenues 188.2 205.3 281.0 163.1 215.2 317.6 347.2 279.4 263.4Total export revenues 210.9 233.1 313.4 192.2 251.0 364.6 396.0 332.9 319.6Imports 63.0 81.5 100.6 86.4 96.7 119.1 128.0 143.3 156.8Trade balance 147.8 151.6 212.7 105.8 154.3 245.5 268.0 189.6 162.8Current account balance 98.9 93.3 132.3 21.0 66.8 158.5 178.5 95.4 66.1(% GDP) 23.9 20.9 23.9 4.8 12.7 23.7 24.5 12.7 8.5Official foreign assets 273.4 359.8 502.0 474.2 520.3 621.5 648.7 695.8 728.5

Social a nd demographic indicatorsPopulation (million) 24.1 24.9 25.8 26.7 27.6 28.4 29.3 30.2 31.1

Unemployment (15+, %) 12.0 11.0 9.8 10.5 10.2 12.4 12.1 10.0 9.5GDP per capita ($) 17,157 17,921 21,458 16,417 19,113 23,594 24,859 24,926 24,916

econ bfg 17feb13 saudijapan business council

Documents