Saudi Arabia will continue its leading position in initial public offerings in the Middle East region though the “market in 2009 will witness less activity in terms of IPOs as compared to 2008,” Dr. Mahdi Mattar, head of research and chief economist of SHUAA Capital, said in the company's report on “Saudi Vision 2009” released last month. He said “we do not expect to see any further offerings from the downstream oil industry for the time being, as the harsh drop suffered by oil and other commodity prices makes such ventures less attractive.” However, some companies in sectors that are currently deemed less desirable such as real estate and the downstream oil industry, which might need to raise capital, would probably revert to private placements, he noted. “We anticipate a significant increase in number of such deals throughout the year,” he pointed out. The report said the Kingdom's current financial and economic challenges “are cyclical and not structural in nature,” forecasting a flat growth for the Kingdom in 2009, with real GDP growing at around 0.33 percent. “This number is heavily skewed by the drop in hydrocarbon real GDP due to the decrease in the production levels of the hydrocarbon sector. The non-hydrocarbon sector will grow in 2009 by 3.9 percent, slightly slower than the 4.4 percent growth in 2008,” the report said. Real GDP growth in Saudi is estimated to slow down to around 0.33 percent in 2009, after recording a growth of 4.2 percent in 2008. Nominal GDP is forecasted to post a 24 percent year-on-year decline in 2009, mainly due to precipitous decline in oil prices, as well as oil production cuts. “These trends support our assessment of slower growth and squeezed profitability for Saudi banks. Our expectations for deposits and loan growth for 2009 stand at a conservative 11.1 percent and 9.3 percent, respectively. We see strong upside potential should oil prices recover and the Saudi Arabian Monetary Agency (SAMA) further relaxes current regulations. Despite looking low in absolute terms, these numbers, relative to GCC peers, will likely be marginally stronger as we see Saudi Arabia providing the best investment climate in the region for the medium term,” Mattar said. The report further forecast a “sharp… not gradual” recovery in the Saudi stock market, adding a 30 percent upside in the Tadawul All Share Index (TASI) benchmark in 2009. Recovery will take place to take place during the second half of the year and to be in the form of a rally after a period of range-bound volatile trading. “Signs of global economic relief are likely to be the main driver for the Saudi market in 2009. Any indication of a possible recovery is expected to increase demand for oil and petrochemicals and put upward pressure on commodity prices. This will clearly have a positive effect on investor sentiment and should set the stage for a recovery,” he added. Mattar said the expected slowdown in lending activity “does not deter our belief that the banking sector will be able to endure this global downturn given the healthy supervisory framework and strong government support.” He explained that the sector will log slower growth than in previous years due to higher funding costs and tighter margins, more pronounced risk aversion on the lending front, 3difficult recovery in brokerage revenues given a volatile market and rising competition from foreign investment banks, and higher provision charges. The petrochemicals demand levels of the fourth quarter of 2008 will continue into 2009. However, evidence suggests that demand is slowly recovering from its depressed levels; ethylene spot prices have picked up in January and early February, partly helped by the idling of some crackers. “We believe clients of petrochemical companies are slowly reducing their inventory to relatively low levels, and Chinese buyers are progressively returning into market following their Chinese New Year - a period of total economic inactivity. Both are minor positives for short-term demand levels, which, we believe, are likely to be reflected somehow in the second quarter results of Saudi petrochemical companies. In the medium-term (beyond the second quarter of 2009), we believe petrochem demand levels and the magnitude of any demand recovery will be highly dependent upon global economic activity, as well as sustained level of Chinese imports, resurrection within the automotive and construction industries, especially in North America and Western Europe. “We note that tight supply market conditions might occur for some polymers products, which might, in turn, provide some support for the price of the commodities themselves. Unless the global economic activity is truly stabilized, which will be reflected in a recovery in hydrocarbon prices, the petrochemical sector as a whole might face difficult times, including the Saudi producers,” the report said. The telecom sector witnessed a growth rate of 15 percent year-on-year in 2008, from 10 percent in 2007. Factoring in slower economic growth in 2009, “we expect the telecom sector, led by the mobile and broadband (fixed and wireless) segments, to deliver high single digit growth with a possibility to surprise us with a low double digit growth.” Saudi Arabia's active mobile penetration reached approximately 125 percent in 2008, and is forecast to grow toward a 145 percent active mobile penetration rate by 2010, the report added. “We expect the tremendous growth in the broadband segment since 2007 to continue over the next few years. High-speed internet penetration almost doubled between 2007 and 2008, from 2.9 percent to 5.3 percent of the population - a level still well below that of OECD countries,” the report noted. Given the current economic situation combined with the steep decline in oil prices, “we believe that the Saudi government will defer any decision related to revising the royalty rate charged to telecom operators. Hence, a potential cut in government revenue share from 15 percent to 10 percent for mobile services, following the entry of the third operator, has been postponed to 2010 or later.” Besides, the report ruled out the launch of a fourth fully-fledged mobile license in the Kingdom, saying that the “only possibility, in our view, is the issuance of a MVNO (Mobile Virtual Network Operator) license. However, we believe the CITC, before considering awarding such license, will take its time to watch the evolving dynamics of the “new three players” market. __
