NCB:Saudi Economic Perspectives 2016-2017

1
3
A New Era of Fiscal Consolidation and Reform
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 Shaikh
Head of Economics
[email protected]
Authors:
Tamer El Zayat
Senior Economist/Editor
[email protected]
Majed A. Al-Ghalib
Senior Economist
[email protected]
• Piercing through 2016, the world’s macroeconomic landscape hasn’t shifted drastically from 2015 as many of the same perils still persist. The slowdown in emerging and
developing economies, which still accounts for over 70% of global growth measured
by purchasing-power parity, is marking its fifth consecutive year, contrasting with a
modest recovery in advanced economies. In April, the IMF’s World Economic Outlook
(WEO) toned down its forecasts for 2016 and 2017’s global output on the back of a
slowdown in manufacturing, investment and weak commodity prices. Therefore, the
pace of growth will be more gradual at 3.2% and 3.5%, respectively.
• Suppressed oil prices will weaken the economic outlook for Saudi in 2016, which will
grow by 1.7%, the lowest since 2009. We believe that the oil sector GDP will decelerate significantly to 0.3% this year based on slower growth in Saudi crude production.
Additionally, the non-oil sector GDP is expected to moderate further this year to below 3% as the economic slowdown weighs on businesses and consumer confidence
alike. The sector will continue to be impacted by the negative spillover effects from
collapsing oil revenues, the recent reductions in subsidies and the fading impact from
the series of royal decrees announced in January and April 2015.
• Elevated production levels, decelerating demand, and record high inventories will
suppress oil prices. Supply factors pertaining to OPEC and demand dynamics pertaining to emerging markets, in particular China, have underpinned this bearish view.
Recently, the failure to reach an agreement to freeze oil production in April has made
it highly likely that oil will remain in a range-bound territory, ending the year below
last year’s levels. According to our baseline scenario for 2016, we assume Arabian
Light prices to average USD45/bbl and Saudi production to remain at 10.2MMBD,
with government announcements underscoring adamancy to protect market share
at any cost.
• 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 decline in the
double-digit. In 2016 year-to-date, with private credit growth outpacing deposits, the
Loans-to-Deposits (L/D) ratio reached 88.7% by the end of April, prompting SAMA
to raise the guidance limit to 90% from 85%. Rising L/D ratio coupled with the increased issuances of sovereign bonds have stressed liquidity levels, as evident from
the continued rise in interbank rates. We do expect further deceleration in broad
money throughout this year.
• The feeble global economic outlook and the lack of inflationary pressures are supporting the tendency of central banks to maintain/intensify monetary accommodation. After a December hike, the Fed reversed to a wait-and-see approach as the
extreme market volatility at the beginning of 2016 risked negative spillover effects
on US markets. In Japan and Europe, aggressive monetary easing is proceeding to
battle the stubbornly low inflation. On the emerging markets front, central banks
are grappling with slower growth, weak currencies and capital outflows, which have
complicated monetary policy. Looking ahead, downside risks stemming from the Chinese economic slowdown, the contained commodity outlook, and a resilient USD will
remain headwinds for global growth.
Business Cycles in KSA
12%
10%
8%
6%
4%
2%
0%
Yasser A. Al-Dawood
Economist
[email protected]
2011
2012
2013
2014
2015P
2016F
-2%
Y/Y Growth in Non-oil Sector, Contribution
Sources: SAMA and NCB
Y/Y Growth in Oil Sector, Contribution
Real GDP Growth Rate
2016 and 2017 Projections
Our macroeconomic projections are based on an average crude oil price (Arabian Light) of USD45/bbl and an average
daily crude oil production level of 10.2MMBD (out of which 72% is exported) in 2016. The decrease in oil revenues will
continue to weigh negatively on the fiscal and current accounts that will register deficits of 13.4% and 8.5% to GDP,
respectively. Real GDP growth is expected to rise by just 1.7%, the lowest since 2009, mainly due to a deceleration in
growth in both the oil and non-oil sectors that will respectively expand by 0.3% and 2.9%, lower than last year’s 3.1%
and 3.6%. Moderation will be across sectors, with key sectors such as trade, construction and manufacturing, growing at 3%, 3% and 2.5%, respectively, driven by the decline in government capital spending and reduced business
sentiment. Ostensibly, the drive towards fiscal adjustment and consolidation will continue unabatedly over the next five
years, which will support economic diversification and sustainability. Fiscal deficits will weigh negatively on net foreign
assets going forward, a situation that has materialized with the government drawing down around USD140 billion since
2015. Chinese growth prospects, G3 monetary policy divergence, and lack of compliance among OPEC members are
the most notable events that can pose risks to our crude oil prices and production forecasts whether to the upside or
downside given the inherent volatility of oil markets.
Key Macroeconomic Indicators
2012
2013
2014
2015P
2016F
2017F
Latest
Date
Real Sector
Weighted Average KSA Crude Spot Price, Arab Light, USD/BBL
110.2
106.4
97.2
50.2
45.0
55.0
32.3
4M16
9.8
9.6
9.7
10.2
10.2
10.3
10.2
4M16
GDP at Current Market Prices, SAR billion
2,752.3
2,791.3
2,826.9
2,449.6
2,322.3
2,488.9
-
-
GDP at Current Market Prices, USD billion
734.9
745.3
754.8
654.1
620.1 664.6
-
-
Real GDP Growth Rate
5.4%
2.7%
3.6%
3.4%
1.7%
2.4%
-
-
Oil Sector GDP Growth Rate
5.1%
-1.6%
2.1%
3.1%
0.3%
1.3%
-
-
Non-oil Sector GDP Growth Rate
5.5%
6.4%
4.8%
3.6%
2.9%
3.2%
-
-
29.2
30.0
30.8
31.4
32.0
32.7
-
-
2.7%
2.6%
2.0%
2.0%
2.0%
-
-
24,849.1 25,172.6 20,840.4 19,370.3 20,353.0
-
-
4.2%
Apr-16
Average Daily Crude Oil Production, MMBD
Population, million
Population Growth Rate
GDP /Capita, USD
CPI Inflation, Y/Y % Change, Average
2.9%
25,172.6
2.9%
3.5%
2.7%
2.2%
4.5%
5.0%
Merchandise Trade Balance, USD billion
246.6
222.6 184.0 62.7
50.6 73.8
-
-
Oil Exports, USD billion
337.5
321.6 284.2 157.6
137.5 168.3
-
-
Non-oil Exports, USD billion
Merchandise Imports, USD billion
External Sector
Invisibles Trade Balance, USD billion
Net Factor Income, USD billion
50.9
54.1
57.9
47.0
41.1
47.5
-
-
(140.7)
(152.1)
(158.5)
(141.8)
(128.1)
(142.0)
-
-
(81.8)
(87.1)
(106.9)
(104.1)
(103.3)
(109.1)
-
-
9.2 11.7
13.8
7.4
7.5
8.5
-
-
Net Unilateral Transfers, USD billion
(28.7)
(34.0)
(36.0)
(38.6)
(41.3)
(42.1) --
Current Account Balance, USD billion
164.8 135.4 76.9 (41.3)
(52.7) (35.3) --
22.4%
18.2%
10.2%
-6.3%
-8.5%
-5.3%
648.5
717.7
725.2
609.7 539.0
515.7 Current Account Balance/GDP
Net Foreign Assets with SAMA, USD billion
-
573.0
Apr-16
Fiscal Sector (Central Government)
Budgeted Expenditure, SAR billion
690.0
820.0
855.0
860.0
840.0
856.8
-
-
1247.4
1156.4
1044.4
608.0
586.3
798.3
-
-
873.3
976.0
1140.0
975.0
897.0
923.9
-
-
Expenditure Overrun, %
26.6%
19.0%
33.3%
13.4%
6.8%
7.8%
-
Total Revenues/GDP
37.5%
44.5%
45.3%
41.2%
37.1%
32.9%
-
-
Total Expenditure/GDP
31.7%
35.0%
40.3%
39.8%
38.6%
37.1%
-
-
374.1
180.3
-95.6
-367.0
-310.7
-125.6
-
-
13.6%
6.5%
-3.4%
-15.0%
-13.4%
-5.0%
-
-
73.9
82.6
103.6
79.2
69.2
67.1
-
-
Actual Revenues, SAR billion
Actual Expenditure, SAR billion
Overall Budget Balance, SAR billion
Budget Balance/GDP
Break-Even Oil Price
Financial Sector
USD/SAR Exchange Rate
3.75
3.75
3.75
3.75
3.75
3.75
3.75 Apr-16
Growth in Broad Money (M3)
13.9%
10.9%
11.9%
2.6%
2.5%
5.3%
-1.5%
Apr-16
Growth in Credit to the Private Sector
16.4%
12.1%
11.9%
9.8%
5.3%
6.3%
10.4%
Apr-16
Average 3M SAR Deposit Rate
0.9%
1.0%
0.9%
0.9%
2.5%
3.0%
1.8%
4M16
Average 3M USD Deposit Rate
0.4%
0.3%
0.2%
0.3%
0.9%
1.5%
0.6%
4M16
55.2
68.7
70.4
56.4
160.0
150.0
113.8
4M16
Spread, in Basis Points, SAIBOR-LIBOR
Note: Saudi Economic Perspectives Data (May 2016)
Sources: Reuters, SAMA and NCB
2
NCB PERSPECTIVES | JUNE 2016
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. The slowdown in emerging and developing economies, which still accounts for over
70% of global growth measured by purchasing-power parity, is marking its fifth consecutive year, contrasting with a
modest recovery in advanced economies. In April, the IMF’s World Economic Outlook (WEO) toned down its forecasts
for 2016 and 2017’s global output on the back of a slowdown in manufacturing, investment, and weak commodity
prices. Therefore, the pace of growth will be more gradual than previously projected at an annualized 3.2% and 3.5%,
respectively. Most of this growth is likely attributed to the proactive unconventional monetary policies undertaken by the
world’s major central banks, including the experimentation of negative interest rates. Inflation rates in advanced economies are below central banks’ targets, thus monetary accommodation remains essential. In addition, higher disposable
income resulting from cheaper energy prices will boost retail and service oriented economies. Fiscal reforms are taking
a backstage with geopolitical tensions on the rise; however, some countries like Spain, India, and the GCC are betting
on bold fiscal adjustments to plug budget deficits. Currency depreciations and capital repatriation are leaving a dismal
outlook on emerging markets while a more stable recovery in advanced economies will continue, albeit at a gradual
pace. Hence, we expect advanced economies to be the locomotive for growth in 2016-2017. Nevertheless, downward
risks to the global outlook are due to spillover from international trade. The Chinese economic slowdown, the contained
commodity outlook, and a resilient USD will remain headwinds for global growth. Commodities continue to unwind since the end of the commodity super-cycle in 2011. According to the Reuters/Jeffries CRB index, commodity markets collectively fell 42.3% between 2011-2015, and in 1Q2016, they slid an
additional 2.7%, indicating no inflection point. The commodity bubble burst was too steep for commodity exporting
countries to absorb, leading to major economic perils in countries such as Brazil, Chile, Australia, Nigeria, and Russia.
One of the largest declines was in crude oil, falling from USD129.9/bbl in early March 2012 to just USD25.8/bbl by late
January 2016 (see box1). Elevated stocks and lower industrial demand forecasts led investors to shy away from base
and precious metals, while ample supply of agricultural commodities led to double-digit declines in prices. Furthermore,
the Goldman-Sachs Agricultural Commodity Index tumbled 34.7% between 2011-2015, reflecting the drastic market
correction, which resulted from over-investment during the commodity market boom. The US dollar’s strengthening
since late 2014, resulting from the Fed’s normalization rhetoric moving away from dovishness, exacerbated the commodity slump. The trade-weighted US dollar index surpassed the 100 mark on March 2015 and remained range-bound
at mid-90s. Such elevated levels for the USD had profound implications on commodities and other USD denominated
assets. Looking forward in 2016, commodity price indices will remain contained due to persistently high supply and
weak growth prospects in emerging markets. Most importantly, China’s new growth model which transitions away from
investment-led growth will remain a hanging cloud on commodities, therefore, we do not expect a full rebound to the
2010-2011 levels.
1. Global GDP Growth
(Annual % change)
2. Selected Commodity Price Indices
(S&P Goldman Sachs Spot Indices; January 100 = 2004)
15%
400%
350%
10%
300%
250%
5%
200%
150%
Sources: IMF
3
Emerging and
and developing
developing economies
economies
Emerging
World
World
Agriculture
Industrial Metals
Sources: Thomson Reuters
Precious Metals
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
-50%
Jan-04
0%
-10%
Advanced economies
economies
Advanced
50%
Jan-06
-5%
100%
Jan-05
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
0%
Petroleum
Benchmark treasury yields are expected to remain compressed due to growing major central banks bondbuying programs. Demand for riskier, higher yielding holdings retracted as global stocks slid sharply early in 2016.
Weak inflationary prospects amid aggressive monetary stimulus, in addition to weak commodity markets had investors
flocking towards the safety of bonds. Japan’s long battle with deflation led policy makers to the uncharted territories of
negative interest rates, pushing 10-year Japanese Government Bonds (JGBs) yields to negative 0.09% by the end of the
first quarter. In comparison to the beginning of the year, the yield on benchmark JGBs slid 132%. In the brutal race to
the bottom, the 10-year German bund yield tumbled 77.8% in 1Q2016 and is poised to fall further as the ECB’s initiatives gains traction. Yield on 10-year US treasuries lost 20.6% in 1Q2016, and the continued accommodative stance at
the Fed will likely keep yields fairly low in the short-run.
3.Emerging Market Economies: Capital Inflows
USD Billion
1500
4. Global Equity Markets
(January 2008 = 100)
30%
20%
1300
10%
1100
0%
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
-10%
900
700
-20%
500
-30%
300
-40%
100
-50%
2012
-100
2013
2014
2015E
2016F
-60%
-70%
-300
Nonbanks, Net
Commercial Banks, Net
Sources: IIF
Portfolio Investment, Net
Direct Investment, Net
World
Emerging Markets
G7
Sources: Thomson Reuters
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
December 2015 by hiking its fed funds rate by 25pbs allowing for a target range between 0.25% and 0.5%. However,
the Fed reversed to a wait-and-see approach as the extreme market volatility at the beginning of 2016 risked negative
spillover effects on US markets. In Japan and Europe, aggressive monetary easing is proceeding to battle the stubbornly
low inflation. The Bank of Japan had a surprise rate cut to negative 0.1% in January, and pledged to increase its monetary base by JPY80 trillion annually. Additionally, the ECB adopted record low zero interest rate, massive EUR80 billion/
month asset buying program and negative deposit rates. Nevertheless, consumer prices hardly budged and are expected
to remain sticky throughout 2016. In the near to medium-term, we do not see inflation in either the Eurozone nor in
Japan reaching their 2% inflation target due to lack of sufficient economic drivers. Indigenous variables such as wage
growth are too slow to warrant meaningful upward pressure, and exogenous variables such as weak trade, and low
global commodity and energy prices are weighing on the inflationary specter.
On the emerging markets front, central banks are grappling with slower growth, weak currencies, and capital outflows
which have complicated monetary policy. Growth forecasts for emerging and developing markets in 2016 and 2017
were marked down in the IMF’s most recent update by 0.2% respectively to 4.1% and 4.6%. Geopolitical uncertainty
and highly volatile oil markets pose huge risks to the forecast. For instance, the fallout of the Petrobras scandal in Brazil,
and Russia’s adjustment to low oil prices and Western sanctions will prolong the recessionary performance in these
economies. Brazil is expected to shrink by 3.8% in 2016 and remain stagnant in 2017, while Russia’s growth will post
another recession at 1.8% in 2016.
China, the world’s second-largest economy, having the weakest economic performance since 1990, with its growth falling below 7% for 2015 and 2016 despite the myriad attempts to reduce interest rates and reserve requirements, and
devalue the Yuan to spur business activity. China’s National People’s Congress (NPC) set a GDP growth rate target of
4
NCB PERSPECTIVES | JUNE 2016
6.5%-7% for 2016, the first time the growth target is set as a range, indicating a shift in strategies to build in greater
flexibility, while continuing with the emphasis on GDP growth. We foresee further interest rate cuts, likely coupled with
unconventional QE-like measures. The 2016’s budget marks an expansion of China’s fiscal policy, with an increase in
the budgeted fiscal deficit to 3.0% of GDP, from 2.3% in 2015 and 1.87% in 2014. The increase adds RMB560 billion
(USD86 billion) to the 2016 budgeted fiscal deficit; this points to stronger fiscal stimulus this year.
5. Central Bank Policy Rates
6. Fiscal Deficits
(in % of GDP)
Advanced
0%
7%
Emerging
World
6%
5%
-1%
4%
-2%
3%
-3%
2%
-4%
1%
FED
Sources: Thomson Reuters
ECB
BOE
May-16
-5%
May-16
May-15
May-14
May-13
May-11
May-12
May-10
May-09
May-08
May-07
May-06
May-05
May-04
May-03
May-02
May-01
0%
-6%
2014
2015P
2016F
2017F
Sources: IMF
The age of deflation reigns on advanced economies in the lack of adequate price pressures. The aftermath of
the great recession left the global economy with a worsening jobs market, and the recovery afterwards has been fragile
and slow. Lending institutions have been more conservative, and borrowers largely turned to savers. Banks’ reluctance
to lend explains most of the dilemma of low inflation despite helicopter money drops and massive scale monetary
stimuli. Global consumer prices are expected to stay low in the medium-term as risk aversion remains notably high. The
European Commission forecasts its harmonized inflation index to grow by 0.5% in 2016, assuming energy prices find
no sudden inflection point. In the US, the inflationary specter is less dismal albeit not completely out of the woods with
core PCE index expected to rise by 1.3%. Japan’s inflation, assuming the efficacy of recent policies could reverse from
-0.2% in 2016 to possibly reach 1.2% in 2017. In contrast, emerging and developing markets have been the subject
of inflationary pressures resulting from currency devaluations in attempts to jumpstart economic activity. Russia, after
recording a whopping 15.8% inflation rate in 2015 is expected to post 8.4% in 2016 on the back of a more stable currency prospect. The IMF forecasts Brazil’s inflation rate to hover around 8.7% in 2016 and Turkey’s at 9.8%.
5
Box 1: Oil… Bottoming-out in 2016
Elevated production levels, decelerating demand, and record high inventories will suppress oil prices to an average of
USD45/bbl in 2016, according to our estimates for the Arabian light. Supply factors pertaining to OPEC and demand
dynamics pertaining to emerging markets, in particular China, have underpinned this bearish view. Even though major
central banks have ceased to be a hanging cloud on global markets, with most stressing their continued support of
accommodative monetary policies, the upside impact on commodities that usually ensue after decisions to expand
quantitative easing and to delay interest rate hikes did not fully materialize as it did in 2009 and 2010.
The lack of compliance among OPEC members that produced above the 30MMBD quota for the 24th month in a row
will be an important drag, especially that the group lacks a unified front. Saudi, Iraq and Iran are adamant in producing as much as they can. The Kingdom’s production continues near record highs, averaging 10.2MMBD year-to-date,
while Iraq has increased output since 2015 by around 0.8MMBD, reaching 4.2MMBD in March. Additionally, lifting the
sanctions imposed in July 2012 on Iran is expected to bring an additional 0.5-1MMBD during this year, which will keep
OPEC’s production above the 32MMBD mark.
Even though non-OPEC members and high-cost producers will continue to be pressured this year, the anticipated decline in their production will not offset OPEC’s over quota strategy. The IEA, EIA and OPEC have forecasted a decline
in non-OPEC supply between 400-750 thousand barrels a day, the first annual decrease since 2008, largely due to the
steeper decline in US shale production. The EIA predicted in its latest report that companies operating in US shale formations will reduce production for the first time in six years, which underscores the challenging environment even after
slashing capital spending, laying off workers and focusing on the most productive areas.
On the demand side, China is expected to have the weakest economic performance since 1990, with growth falling
below 7% for 2015 and 2016 despite the myriad attempts to reduce interest rates and reserve requirements, and devalue the Yuan in order to spur business activity. Furthermore, emerging markets are expected to expand at 4%, the
slowest pace since 2010 and well below their ten-year average of 7%. Generally, the three eminent organizations are
forecasting oil demand to rise between 1.1-1.25MMBD in 2016, much slower than last year that saw demand grow by
more than 1.5MMBD, a five-year high.
The record US and global crude oil inventories will also continue to weigh on oil markets. The early April US crude oil
inventory that stood at 529.9 MMbbls is 37% more than the level recorded in 2014, which was 388 MMbbls, and is also
at an 80-year high for this time of year. Additionally, OECD’s commercial total oil inventories rose to around 3.023 billion
barrels, near a record level that is equivalent to 65.3 days of consumption and above the five-year average. Given these
aforementioned dynamics, and most recently the failure to freeze production in Doha, we do not expect the market to
balance in 2016, with oil being contained within a USD30-50/bbl range. Crude Oil Price Developments
MMBD
98
OECD Forward Demand Cover
Days
USD/bbl
Projections
96
94
120
75
100
70
80
65
60
60
40
55
20
50
0
45
Apr-11
92
90
88
86
84
1Q12
1Q13
1Q14
1Q15
World Demand, LHS
Sources: EIA
1Q16
1Q17
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
WTI, RHS
Sources: EIA
6
NCB PERSPECTIVES | JUNE 2016
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 lowest since 2009. Last year, a moderate business cycle took hold, weighing on non-oil economic activities that grew by
3.6% compared to 4.8% in 2014. This deceleration was driven by lesser oil revenues trickling down into the economy,
especially as the government had to reduce spending to minimize the budget deficit. Nevertheless, real GDP growth
at 3.4% was supported by the oil sector, which expanded by a substantial 3.1%, on the back of record production
levels above 10MMBD as the Kingdom utilized its excess capacity to maintain market share amidst rising non-OPEC oil
production, namely US shale. In nominal terms, the sharp decline in Arabian light average spot price to USD50.2/bbl,
48.3% below 2014’s average, resulted in a significant contraction in nominal GDP by 13.3%, the first contraction since
2009. Going forward, it is highly likely that oil will remain in a range-bound territory, ending the year below last year’s
levels, which will undermine economic growth for this year. Therefore, we believe that the oil sector will decelerate
significantly to 0.3% this year based on slower growth in Saudi crude production. In contrast, real non-oil GDP sector
is expected to moderate to 2.9% this year, yet as government reforms unravel, the sector will be the primary force to
maintain 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. In 2015, oil contributed 42.7% to real GDP and represented
73.1% of total fiscal revenues. Despite bottoming-out in February, downside risks on oil prices remain entrenched due
to record inventory levels, technological advancements in shale fracking and sluggish global demand growth. Additionally, lower compliance among OPEC members implies that excess supply will continue throughout this year, and as such
we do not foresee Saudi cutting its record oil production levels anytime soon, neither unilaterally or collectively. Interestingly, recent government announcements underscored adamancy to protect market share at any cost, with the possibility of increasing output to 11.5MMBD, yet it is our opinion that such scenario will not materialize. According to our
baseline scenario for 2016, we assume oil prices to average USD45/bbl and Saudi production to remain at 10.2MMBD,
and in turn oil revenues are expected to decline to SAR386.3 billion, 13.1% lower than 2015. On a medium-term note,
prolonged low oil prices will force high cost oil producers to curtail capital spending, reduce investments, and in turn
reduce supply, thus, putting upward pressure on prices as inventory levels gradually return to normal levels.
7. Real GDP Growth, Contribution
8. Saudi Crude Oil Production
10%
MMBD
12
8%
10
6%
8
4%
6
2%
4
2
0%
2011
2012
2013
2014
2015P
2016F
-2%
0
Non-oil Private
Sources: SAMA and NCB
7
Non-oil Public
Oil
Real GDP
2009
2010
Sources: OPEC and NCB
2011 2012
2013
2014 2015P 2016F
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. The sector will continue to be impacted by the negative
spillover effects from collapsing oil revenues and the recent reductions in subsidies. The rationalization of government
spending, the only channel to convert the country’s oil wealth into economic development, has affected the outlook
for business sentiment, evident from our forward looking NCB Business Optimism Index (BOI), whereby the non-hydrocarbon sector composite index for 2Q 2016 posted the sixth quarterly decline to settle at 21 points, which is also the
second lowest level since the inception of the index in 2009. Additionally, consumer activity, gauged by cash withdrawals and Point Of Sale (POS) transactions had been indicative of a less buoyant outlook. During the month of February,
cash withdrawals declined by 13.3% Y/Y, while POS transaction values retreated by 9.0% annually, the largest decline
since June 2009. We do believe that lower disposable income from the hikes in energy and water prices in addition to
the negative wealth effects from the back-to-back annual declines in Tadawul will weaken consumption expenditure,
especially on big-ticket items. The one-time two-month salary to all Saudi public sector workers that was granted in
early last year already ceased to stimulate spending. Accordingly, we expect the retail sector to decelerate to 3.0% this
year, down from 3.9% in 2015.
In an attempt to control spending, the Ministry of Finance (MOF) has stopped awarding contracts since 4Q 2015, which
has affected the construction sector. The construction market will seek a greater reliance on private sector initiatives
to support a declining projects market. Consequently, we expect the value of awarded construction contracts to fall
significantly below the SAR200 billion, the weakest level since 2010. The oil & gas sector is expected to continue receiving the majority of construction contracts, underpinned by Saudi Aramco’s announcement of sustaining investments
despite low oil prices. The oil sector secured 36.6% of total contracts in 2015, according to NCB’s Construction Contract
Awards Index. Despite the recent moderation, the fact that contracts awarded amounted to around SAR1.6 trillion during the period 2008-2015, will continue to provide support to the sector via “momentum spending”, resulting in an
expected 3.0% expansion in 2016.
The government is adamant on adopting structural reforms to attract capital inflows across different sectors, which had been highly concentrated around oil & gas. In the retail sector, for instance, the government will
allow full foreign ownership of businesses without a local sponsor, which is expected to encourage investments and
increase the appeal of the Saudi market. A recent announcement of a US green-card like program will provide the highly
skilled and foreign entrepreneurs the ability to apply for residency that will enable them to own real estate and setup
businesses, which in our opinion, might also reduce remittances over the medium-term. The 2015/16 Global Competitiveness Report prepared by the World Economic Forum ranked Saudi Arabia at 25 out of 140 countries, ahead of
China, Spain, Indonesia and Turkey. Additionally, according to the World Investment Report 2015, issued by the United
Nations Conference on Trade and Development, the Kingdom was the third-largest Foreign Direct Investment (FDI)
recipient in West Asia, with receipts totaling USD8.0 billion in 2014, 9.6% lower than 2013, surpassed by Turkey and
the UAE that posted USD12.1 billion and USD10.1 billion, respectively. Even though FDI had been on a downward trend
since 2008, we do believe that FDI levels will be supported again above USD10 billion mark by the government’s initiatives to attract international investments, as evident by recent bilateral agreements such as the Saudi-Korean agreement
to develop 100’000 housing units over seven years with a value of USD10 billion.
9. Non-oil GDP Growth, Contribution
10. Real GDP Growth by Expenditure, Contribution
10%
15%
8%
10%
6%
4%
5%
2%
0%
0%
2011
2012
2013
2014
2015P
2016F
-5%
2011
2012
2013
2014
Manufacturing
Electricity & Water
Net Exports
Change in Inventory
Construction
Trade, Hotels, and Restaurants
Gross Fixed Capital Formation
Transport and Communication
Financial, Insurance, and Real
Estate Services
Government Final Consumption
Expenditure
Private Final Consumption
Expenditure
Real GDP
Other Sectors
Sources: SAMA and NCB
Sources: SAMA and NCB
8
NCB PERSPECTIVES | JUNE 2016
We believe that inflation will edge higher to average 4.5% for 2016 with domestic inflationary pressures offsetting the positive international dynamics of a resilient USD and contained global commodity prices. Given
the peg of the Saudi Riyal to the US Dollar, the strength of the latter during the last two years had reduced imported
inflation on domestic prices. The trade weighted dollar index, which tracks the USD against currencies of six major
trading partners, ended 2015 at 98.6 while averaging 96.3 throughout this year, 16.4% higher than 2014’s average of
82.7. Additionally, the Reuters/Jefferies CRB index, a global commodities gauge, dropped by a substantial 23.4% last
year. This contributed to the continued deceleration in the largest component of domestic inflation, food and beverages, which recorded an average rise of just 1.7% for 2015, the third consecutive annual slowdown. The second largest
category, housing and utilities, remained stable for the fourth year, posting an average of 3.4% for 2015. The recent
approval of “white land” tariffs is expected to contain any upside potential for real estate prices by encouraging land
development, thus, mitigating the housing shortage. However, given the recent reduction in energy subsidies, which
included higher pricing for electricity and water consumption, the category of housing and utilities will rise considerably
above 8% Y/Y in 2016. In addition, the transport sub-index will increase by around 13% following the 33% and 50%
increase in 95 and 90 octane gasoline, respectively.
11. Drivers of Inflation
12 . Imported Inflation
(January 2010 = 100)
8%
40%
35%
6%
30%
25%
4%
20%
15%
2%
10%
5%
Other
Foodstuff and Beverage
Overall CPI
Sources: SAMA
SAR/GBP
Jan-16
Jul-15
Jan-15
Jul-14
Jan-14
Jul-13
Jul-12
SAR/EUR
Jan-13
Jan-12
Jul-11
Jul-10
-10%
Renovation, Rent and Fuel
Jan-11
0%
-5%
Jan-10
0%
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
Trade Weighted Dollar
Sources: Thomson Reuters
Box 2: SCIs: Moderation in the Offing
2016’s government budget allocations to specialized credit institutions (SCIs) have moderated significantly, yet their
continuation reflects adamancy to support the economy. According to the budget announcement, SAR49.9 billion will
be allocated to SCIs, namely the Saudi Industrial Development fund (SIDF), Saudi Credit & Saving Bank (SCSB), and
the Real Estate Development Fund (REDF). According to the latest available data published by SAMA, the consolidated
balance sheet for SCIs points to: (1) a significant increase in the disbursements of new loans by SAR40.8 billion during
2015, a 13.1% Y/Y growth rate, (2) an increase in the total value of investments to around SAR163.6 billion by the end
of 2015, which was attributed to a growing domestic portfolio that rose from SAR115.9 billion by the end of 2014 to
SAR149.4 in 2015, (3) an insignificant increase in foreign investments that remained around SAR14 billion mark, and
(4) a sizable decline in deposits with SAMA by around 47% Y/Y to SAR36.7 billion, reflecting the withdrawal of such
deposits in order to extend loans to local companies. These latest data reflect the central role played by SCIs as a catalyst
in the domestic economy.
As expected, the REDF was largest among these institutions in terms of the outstanding loans that registered SAR145.9
billion, and it is our believe that such figure will cross the SAR150 billion threshold in the coming data releases. It is no
surprise that REDF will maintain its status as the largest lender among SCIs with the government trying to mitigate the
housing market imbalances especially at the demand side. The Public Investment Fund and SCSB had also maintained
the second and third rank given their participation in project finance across different sectors that enhance the kingdom’s
absorptive capacity, with the outstanding loans of both standing at SAR103.9 billion and SAR41.9 billion, respectively.
On the Small and Medium scale Enterprises (SMEs) front, the Loan Guarantee Program “Kafalah”, which is attributed
to a collaboration between the Ministry of Finance represented by SIDF and Saudi banks continued to gain ground,
9
facilitating credit worth around SAR1.6 billion by the end of 1H2015 to 752 establishments, representing 12% of the
aggregate beneficiaries since the inception of the program in January 2006. In our opinion, supporting SMEs is critical
for job creation and the expansion of the private sector, and as such the SAR13 billion loans that had been granted over
a 10-year time frame to such asset class, a mere 1% of banks’ loan portfolio, need to be expanded. Going forward,
the decline in oil prices and the unfavorable business cycle witnessed since the second half of 2014 is expected to limit
budget allocations to SCIs, making it harder to maintain the double-digit growth in loans, yet we do believe that new
lending will center around the viability of projects, in line with government strategy to prioritize spending and enhance
efficiency. Investments by Type
Loans
SAR Million
10%
400,000
25%
350,000
20%
300,000
250,000
15%
200,000
10%
150,000
100,000
0
0%
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
90%
5%
50,000
Domestic
Foreign
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. The 2016’s budget estimates revenues and expenditures at SAR513.8 billion and SAR840 billion, respectively, projecting another deficit at SAR326 billion. Although the budget press release does not provide oil price and
production level assumptions, we believe that both revenues and expenditures are understated. Based on announced
revenues, government assumed next year’s oil prices to average USD35/bbl. With our forecast of USD45/bbl for the average Arabian light spot prices and 10.2MMBD for average oil production, we project a slightly smaller budget deficit at
SAR311 billion, or 13.4% of estimated GDP in 2016. The oil glut continues to pressure crude prices, which is expected
to reduce oil revenues to SAR386 billion, a decline of 13.1% over 2015’s SAR445 billion, and in turn total revenues are
projected to reach SAR586.3 billion. In contrast, non-oil revenues are expected to reach SAR200 billion in 2016, offsetting the decline on the oil side. The 22.3% annual increase in non-oil revenues is attributed to the implementation of
higher energy and water prices and, notably, the boost in investment income that had risen by 69.3% last year and is
likely to continue with the government adapting an active portfolio strategy. On the expenditure side, we expect government spending to decline by 8% to SAR897 billion, following last year’s double-digit decrease that stood at 14.5%,
as spending measures in the Royal decrees of last year have not been rolled out and as the cost control measures intensify. Against this backdrop of back-to-back reductions in actual expenditures and near record crude production, the
break-even oil price required to balance the budget is estimated to decline to USD69/bbl.
The current account balance registered a deficit in 2015, the first since 1998, a situation that will continue
well into this year. Based on our oil price and production assumptions, we expect oil export revenues to decline by
12.7% to USD137.5 billion. Ostensibly, we expect a contraction in non-oil exports as prices for petrochemicals and plastics remain pressured. Both categories constituted the majority of non-oil exports, around 60% in 2015. By the end of
last year, the total value of petrochemical and plastic exports dropped by 19.6% and 26.4%, respectively. China’s moderation has affected Saudi exports as the Asian giant is one of the major destinations for Saudi products with a value
of SAR19.9 billion, dropping by 25.2% on an annual basis and retiring first place to the UAE, which received SAR24.3
billion of domestic exports in 2015. As for imports, they have marginally declined on the back of contained global prices
10
NCB PERSPECTIVES | JUNE 2016
and a stronger dollar. Total imports settled at SAR609.4 billion, declining by 6.5% Y/Y from SAR651.9 billion in 2014.
Additionally, faltering domestic demand has resulted in a decline in the value of the settled and newly opened Letters of
Credit (LCs) that respectively fell by 1.2% and 8.3% in 2015 with building materials and machinery underpinning the
drop due to the slowing construction sector. Accordingly, we expect the current account to record a deficit of USD52.7
billion this year, 8.5% relative to GDP. The prolonged decline in oil prices will continue to weigh negatively on net foreign assets, with the government projected to withdraw a further USD70.7 billion in 2016, yet this slower pace of draw
down will be covered by more reliance on debt issuances.
13. Government Revenue and Expenditure Balance
SAR billion
2014
Total Revenue
2015
2016 Budget
2016 Forecast
1,044
608
514
586
Oil
913
445
349
386
Non-Oil
127
164
164
200
1,140
975
840
897
Total Expenditure
Current
740
731
657
718
Capital
740
244
183
179
Deficit/Surplus
(96)
(367)
(326)
(311)
Sources: SAMA and NCB
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. Rating agencies, Moody’s, S&P, and Fitch, had maintained investment grades for the Kingdom’s sovereign rating, despite the recent downgrades due to the unfavorable
impact on oil revenues. The government has recently taken steps towards fiscal consolidation, economic diversification,
and sustainability. Saudi Arabia has been able to withstand oil price volatility and the slow global economic recovery
by withdrawing from its vast amount of reserves, which stood at USD609.7 billion, around 90% of GDP by the end of
2015, the third largest in the world after China and Japan. Albeit the increase, public domestic debt still represented
just 5.9% of GDP last year and is expected to rise to near 10% as the government taps into domestic and international
debt markets in tandem with withdrawals from foreign reserves to contain financial shocks and provide stability. We
expect a more balanced approach in plugging the anticipated fiscal shortfall with the Kingdom trying to benefit from
the prevailing low interest rate environment.
14. Twin Deficits
15. Government Expenditure
SAR billion
1,200
25%
20%
1,000
15%
800
10%
600
5%
0%
2011
2012
2013
2014
2015P
2016F
400
-5%
200
-10%
0
-15%
Current Account Balance / GDP
Sources: SAMA and NCB
11
Budget Balance / GDP
2011
2012
Captial Expenditure
Sources: SAMA and NCB
2013
2014
2015P
Current Expenditure
2016F
Saudi Vision 2030 provides the blueprint to move away from an oil-centric economy, vital to that is diversifying the economy in every sphere: economic, human, and social. The vision is targeting sustainable economic
development based on three pillars, being the heart of the Islamic world, being identified as an investment powerhouse,
and exploiting the strategic geographical location of the country. The cumulative outcome of the myriad programs is
expected to increase the size of the domestic economy by almost twofold to overcome the likes of Switzerland, Turkey,
and Mexico to achieve the target of being the 15th largest economy globally. Emphasizing the role of private enterprises
in Vision 2030 will enhance the private sector contribution to real GDP to 65% and magnify foreign direct investment
to 5.7% of GDP in 2030, up from the current 3.8%. The government target of increasing home ownership from 47%
to 52% by 2020 implies adamancy to mitigate the housing shortage that had constituted a challenge over the last two
decades. SMEs will continue to receive the much needed support through easing regulations and greater access to funding as their contribution to GDP is planned to increase from 20% to 35%.
Fiscal consolidation is also an integral part of economic sustainability, with the government streamlining subsidies and
planning to propel non-oil revenues from SAR163 billion in 2015 to around SAR600 billion by 2020, which according
to the government will balance the budget at that time. On a longer-term horizon, the investment focus of building the
largest sovereign wealth fund with a planned value of SAR7 trillion, partly by selling a 5% stake in Saudi Aramco, will
propel investment income that will exceed oil revenues by 2030. Additionally, this fund will allocate 50% of its portfolio
in international investments to reach the colossal target. The social aspect of the vision is targeting a decrease in the
unemployment rate to 7% as well as increasing female participation rate to 30% through providing jobs for Saudis,
namely 1 million jobs in the retail sector and 90’000 jobs in the mining sector. In this transition phase, higher oil prices
will be used as a catalyst for accelerating the vision rather than an impediment.
16. Domestic Public Debt
17. Government Deposits at SAMA
SAR billion
2011
2013
2012
1,800
+194 bn +329 bn +125 bn
20%
2014
-80 bn
2015
-398 bn
1,600
1,400
0%
2008 2009 2010 2011 2012 2013 2014 2015P 2016F
1,200
1,000
-20%
800
600
-40%
400
200
-60%
Gross Domestic Public Debt/GDP
0
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Net Domestic Public Debt/GDP
Sources: SAMA and NCB
Sources: SAMA
2.3 Monetary Developments
The monetary situation in the Kingdom is largely reflective of the oil narrative. Oversupplied oil market and
a stronger US dollar pressured oil prices to substantially low levels, leading to a gap in government spending. Thus,
growth prospects in Saudi Arabia remain heavily dependent on the single commodity despite diversification efforts. Due
to lagging effect, we only start to notice a deceleration in money supply growth early 2015, ending the year at 2.6% to
reach SAR1.78 trillion. In 2016, the growth rate decelerated further, falling into negative territory. As global oil markets
are expected to remain sluggish throughout this year, we do not see a short-term rebound in liquidity. Monetary policy
at SAMA remains dedicated to preserving the dollar peg with no room for easing. SAMA bill holdings by Saudi banks
declined by 39.7% Y/Y to SAR136.3 billion in order to free bank liquidity for the longer maturity government issuances.
On the fiscal front, the government relied on foreign reserves during 2015, withdrawing around SAR115.9 billion to
finance the budget deficit, thus eroding reserve assets by 15.8% compared to a year ago. During the second half of
2015, the government issued sovereign bonds with varying maturities, 5-year, 7-year, and 10-years, tapping into the
unutilized debt capacity of the Kingdom.
12
NCB PERSPECTIVES | JUNE 2016
18. SAMA and US Federal Reserve Policy Rates
19. Interbank Market Rates
0%
0%
May-16
Repo Rate
May-15
May-13
May-12
May-11
May-10
Reverse Repo Rate
Federal Funds rate
3M SAIBOR
Sources: Thomson Reuters and SAMA
May-16
1%
May-15
1%
May-14
2%
May-13
2%
May-12
3%
May-11
3%
May-10
4%
May-09
4%
May-08
5%
May-14
5%
May-09
6%
May-08
6%
3M USD LIBOR
Sources: Thomson Reuters
In 2015, the monetary base grew by 6.6% to SAR301.5 billion, which is considerably below 2014’s 10.5%
growth. The main culprit in the subpar monetary base performance is the dwindling of public financial institutions’
deposits by 50.7% to just SAR4.7 billion. Currency outside banks is the only money supply component that maintained
a double-digit annual growth, surging by 10.1% to SAR169.3 billion. Demand deposits, which accounted for the largest component, making up around 55% of broad money supply recorded an annualized decline of 1.3% to SAR976.2
billion. On the other hand, we note that the propensity to save has increased during 2015 as indicated by the growth
of time and savings deposits by 9% Y/Y, totaling SAR434.5 billion. Quasi monetary deposits that include deposits of
foreign currency, marginal deposits for LCs, and outstanding remittances edged up by 3.4% to SAR194 billion. Overall
broad money supply rose by 2.6% in 2015 and is expected to decelerate further due to lower government spending
and slower economic growth.
20%
10%
10%
5%
0%
0%
M3
Sources: SAMA
13
M0
Mar-16
Mar-13
-10%
Mar-15
15%
Mar-14
30%
Mar-12
20%
Mar-11
40%
Mar-10
21. Growth in Private Sector Credit
Mar-09
20. Growth in Money Supply
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16
-5%
12m MA, M0
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 system registered a mere 1.9% gain last year, the weakest gain since the Gulf War. Saudi Banks primarily rely on deposits
to expand their balance sheets by extending credit lines to the private and public sector. Consequently, total claims of
the banking system, excluding T-bills and government bonds, decelerated to 8.9% Y/Y for 2015. Despite the challenges,
Saudi banks were able to grow their net profits by 5.4% last year to generate a collective SAR43.7 billion. The current
cost of funds remains low as over 60% of deposits are non-interest bearing, which will allow banks to profit from higher
margins as interest rates creep higher over the medium term, yet, the challenge will be to remain liquid in order to grasp
lucrative opportunities. In 2016 year-to-date, with private credit growth outpacing deposits, the Loans-to-Deposits (L/D)
ratio reached 88.7% by the end of April, prompting SAMA to raise the guidance limit to 90% from 85%. Rising L/D ratio coupled with the increased issuances of sovereign bonds have stressed liquidity levels, as evident from the continued
rise in interbank rates. In our opinion, as the government retracts from being the driving force for expenditure and the
private sector takes on a more active role, credit demand will pick up after this transition.
After entering a bear market territory in January, Tadawul found some reprieve, rebounding from its bottom and is expected to end the year on the positive side. During 2015, a strong positive correlation of 0.88 has
been registered between oil prices and Tadawul’s main index, underscoring the negative drag on the index last year,
which fell by a 17.1%. Equity investors’ risk averseness resonated from the fiscal challenges the economy continues to
face. In addition, the geopolitical tensions have weighed on stocks as the ongoing military intervention in Yemen, the
heightened political stand-off with neighboring Iran over Syria and other issues discouraged investors. The 11 approved
Qualified Foreign Investors (QFIs) that were allowed to access the market since the first half of 2015 did not provide the
institutional support expected yet, with their total ownership currently standing at just SAR1.2 billion, an insignificant
0.09% of Tadawul’s market capitalization.
Furthermore, trading activity in 2015 experienced a slowdown as average daily trading values declined by 22.9% Y/Y
to settle at SAR6.6 billion. Corporate profitability also declined by 13.7% annually, recording SAR98.7 billion, bringing
the price-to-earnings ratio down to 13.8, an attractive proposition considering the Dow’s and S&P500’s ratios at around
15 and 20, respectively. Moving into 2016, the Capital Market Authority announced an ambitious plan to increase the
market’s capitalization to mirror the economy’s size. The plan also includes easing regulations for foreign investors and
an array of products such as derivatives, debt products, and real estate investment trusts to cater for more sophisticated
investors. Furthermore, the depth of the market is expected to reach a total of 250 companies within seven years. While
investors have shown great interest in Initial Public Offerings (IPO) over the years, it will be quite challenging to entice
companies to turn public given the current economic dynamics of risk aversion and expectations of lower corporate
profitability. During 2015, only four companies turned public, down from six a year ago, and the total value raised
dropped by 83.5% annually to settle at SAR4.15 billion. However, as part of Saudi’s transformation plan, oil giant Saudi
Aramco is expected to go public next year in an effort to establish a USD2 trillion sovereign wealth fund. Even though
less than 5% of the company will be offered, the IPO will likely enhance the primary market performance by attracting
local and international investors.
22. Saudi Equity Market Index
(January 2009 = 100)
23. Saudi IPO Issuance
SAR million
150%
30,000
125%
25,000
100%
20,000
75%
15,000
50%
10,000
25%
5,000
10
9
8
7
6
5
4
3
2
1
0%
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
0
0
2010
2011
2012
2013
2014
2015
-25%
Tadawul Index
Sources: Tadawul
Capital Raised
Number of Issues, RHS
Sources: SAMA
14
NCB PERSPECTIVES | JUNE 2016
The global economic slowdown diminished the appeal for alternative financing, with global Sukuk issuances falling by 38.8% Y/Y in 2015 to USD66.8 billion, raised through 727 issuances. Malaysia continues to
represent the largest market for Sukuk, albeit recording a significant decline. The total value of Malaysian issuances
reached USD34.8 billion in 2015, half of its 2014 level. Indonesia took second place with a value of USD8.2 billion
through 84 issuances, growing by 64.6% and 52.7% in terms of value and number of issuances, respectively. As for
Saudi Arabia, the issuance of 16 Sukuk with a total value of USD7.0 billion placed it third in 2015 on a global scale. This
marks the second consecutive annual drop after reaching a record level in 2013 at USD15.2 billion. The slowdown in
the domestic business cycle is expected to lessen the need for extensive issuances over the near-term. Even though the
recent government bond issuances will act as a benchmark for future issuances, the relatively higher yields offered by
the government are likely to raise the cost of funding for companies opting for Islamic financing. Overall, we expect a
moderation in the Sukuk market going forward.
25. Saudi Share of GCC Sukuk Issuance, 2015
24. Saudi Sukuk Issuance
USD billion
64%
22
20
18
16
14
12
10
8
6
4
2
0
20
18
16
14
12
10
8
6
4
2
0
2010
2011
Debt issued
Sources: Zawya
2012
2013
2014
36%
2015
Number of issues (RHS)
KSA
Rest of GCC
Sources: Zawya
2.5 Risks
Systemic macro and banking sector risks are still low. Nevertheless, the hefty surpluses of recent years have reversed due
to the significant decline in oil prices, which will necessitate countercyclical policies. A crowding-out effect and tighter liquidity amid the rising issuances of government development bonds might be challenging to banks, but in reducing the
stock of T-bills and easing the L/D guidance limit to 90% from 85%, SAMA will be able to mitigate these risks. Gauging
the risks on the banking system through non-performing loans (NPLs) reveals that banks are well poised to counter possible future shocks. Yet, as lesser oil revenues trickle down into the economy, and the business environment becomes
more challenging, NPLs are likely to increase. The currently contained NPL ratio illustrates the prudent management and
supervisory practices that have been applied by banks and SAMA. By the fourth quarter of 2015, banks registered an
industry-wide NPL ratio of 1.1%, in comparison to the 1.9% recorded during 2004-2008. Saudi banks’ tier 1 ratio in
specific and the capital adequacy ratio in general are at comfortable levels, currently, at 16.2% and 18.1%, respectively,
double the Basel’s III requirements. Figure 26 below depicts key macro and banking sector vulnerability indicators of
Saudi Arabia between 2010 until 2015.
15
26. Key Systemic Macro and Banking Sector Risk Indicators
Key Systemic Macro and Banking Sector Risk
Indicators
2010
2011
2012
2013
2014
2015
1. Macro Risks
Overall Budget Balance/GDP
4.4%
11.6%
13.6%
6.5%
-3.4%
-15.0%
Gross Domestic Public Debt/GDP
8.5%
5.4%
3.6%
2.2%
1.6%
5.9%
Net Domestic Public Debt/GDP
-41.8%
-41.9%
-51.5%
-56.7%
-53.6%
-41.7%
Net Banking Sector Claims on the Government (SAR bn)
(931.6)
(1,140.4)
(1,474.3)
(1,591.9)
(1,507.6)
(1,076.4)
Overall Current Account Balance/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%
Net Foreign Assets/Imports of Goods and Services
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%
Merchandise Import Coverage (1YR ahead imports, in months)
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%
Minimum Risk Assets/Total Assets
34.9%
33.8%
32.7%
31.4%
31.7%
4.4%
Cash and Balances with SAMA/Total Assets
11.1%
11.7%
12.5%
10.6%
9.5%
6.8%
Tier 1 Capital Adequacy Ratio
16.6%
16.1%
15.8%
16.4%
16.2%
16.2%
Non Performing Loan (NPL) Ratio
2.9%
2.3%
1.9%
1.4%
1.1%
1.1%
NPL Coverage Ratio
115.7%
133.2%
145.3%
157.4%
182.9%
172.3%
Sources: Financial statements of commercial banks, SAMA and NCB
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The Economics Department Research Team
Head of Research
Said A. Al Shaikh
Head of Economics
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Macroeconomic Analysis
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Tamer El Zayat
Majed A. Al-Ghalib
Ahmed Maghrabi
Sharihan Al-Manzalawi
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Associate Economist
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Yasser A. Al-Dawood
Sultan Mandili
Hanan M. Al Asiri
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