The Saudi Arabian economy remains one of the strongest in the region, and indeed globally, at a time when macroeconomic concerns still abound on the pace of recovery after the financial crisis of 2008-2009, the “Saudi Factbook 2010” report by NCB Capital said on Saturday. The performance of the Saudi economy has been characterized by considerable resilience in the face of the global economic slowdown. While this show of strength highlights the effectiveness with which the government mobilized its reserves to support economy activity, it also reflects the Kingdom's increasingly diversified economy, resulting from years of proactive initiatives and a relatively stable banking sector. Oil prices and production levels are still major drivers of the Saudi economy. However, years of proactive measures by the government to diversify the economy, along with government stimulus efforts, resulted in 2009 real GDP growth remaining positive at 0.6 percent. This at a time when most major economies globally faced declining GDP levels. “We expect real GDP growth of 3.8 percent for the Saudi economy in 2010, which is down slightly from our projections from the beginning of 2010 (of 4.0 percent). This reflects the tentative nature of the private sector recovery in the face of global risks caused by the sovereign debt crisis in the euro zone. In addition, although the oil market remains subject to strong conflicting pressures, the increased uncertainty about demand can expected to contain the average price for the year to around $75- 76 per barrel.” The report also forecast only marginal production growth of 1.2 percent to 8.4 million bpd in 2010, due to increasing demand from emerging Asian economies, over the previous year's 8.3 million bpd when production contracted by an estimated 10.0 percent. These developments will likely result in oil sector growth of around 3.7 percent for 2010, it said. The non-oil sector was projected to record real growth of around 3.8 percent, driven largely by strong government spending and increasing private consumption. “We expect non-oil GDP to grow 3.8 percent in 2010, similar to our overall expectations for the economy,” the report said. Saudi growth remained positive, with real GDP expanding by 0.6 percent in 2009, an impressive achievement at a time when most major developed economies contracted anywhere from 2-5 percent. Growth was to a large extent driven by the government sector, which increased 4.4 percent during the year but also the private sector recorded strong growth, even if the headline figure declined to 3.5 percent in 2009 from 4.8 percent in 2008. Growth in 2010 looks assured, despite new areas of concern in the global economy coming to the forefront: Greece/the euro zone budgetary sustainability, US financial reform, the health of China's recovery, etc. While oil prices have remained volatile, we expect the average for the year to remain in the $75-76 range, up from the $62 average in 2009, which should result in a return to a fiscal surplus and should support growth in the economy. However, higher oil prices alone are not driving the rebound in the economy, the report pointed out. Moreover, the Tadawul All Shares Index (TASI) was the strongest in the GCC in 2009 (up 27.5 percent) and as of mid-year 2010, is the strongest globally at just above flat for the year. All markets in the region and globally are down so far in 2010 as the ongoing concerns on the global recovery have halted any market rallies to date. The report noted that apart from the petrochemical sector, which accounts for about 27 percent of the weighting in the TASI and “which is very globally exposed,” most other sectors are much more domestically focused. These sectors are benefiting from the continued growth in the economy, as well as the strong demographic trends such as a young, growing, and increasingly affluent population. The agriculture/food and retail sectors are among the top performing sectors as of mid-2010, up about 10 percent each, it pointed out. It forecast that 20 percent-plus growth in earnings for companies in the TASI is possible for 2010. Given still reasonable market valuation levels, “we believe earnings growth should drive a rise towards the 7,000 level for the TASI by the end of the year.” However, volatility is expected to remain high, especially through the summer period as volumes lighten locally and regionally, it added. With Ramadan finishing in early September this year, the stage seems set for a return to growth in the final quarter of the year, the report further said. Within the GCC, the Saudi market is by far the largest both in size and in turnover value. As of end June 2010, the TASI market capitalization was SR1,241 billion ($330 billion), 51 percent of the GCC markets total market capitalization of $650 billion. While the general direction of all of the markets in the region has been similar over the past few years (peaking in 2008, bottoming in March 2009), the TASI has shown relative strength as the percentage of GCC market capitalization has grown over this time. In 2008, the Saudi market made up about 43 percent of the GCC market capitalization, while in 2009, this grew to 47 percent, and more recently has been above 50 percent. The major decliners during this period have been Dubai and Kuwait, due to market specific issues in both countries. • In Dubai, the impact of the economic downturn on the real estate market and subsequently on Dubai World has hit the DFM particularly hard given the large exposure of real estate, construction, and banking in the index. The DFM's market capitalization has fallen from 10 percent of the GCC in early 2008 to 5 percent more recently. • In Kuwait, the large exposure of many of the banks and investment companies to real estate and the markets has negatively impacted the overall market. Kuwait comprised about 20 percent of the GCC market capitalization in 2008 but has fallen to 15 percent more recently. Turnover volumes have shifted to the Saudi market. The TASI has historically been a relatively high turnover market, reaching a peak of over $5 billion in average daily trading turnover in 2006 (a peak of over $12.6 billion in turnover was reached on Feb. 14, 2006). Since then, trading volumes have steadily declined, but looked to have reached a bottom over the past year. Average daily trading volumes were SR5 billion ($1.35 billion) in 2009 and in 2010 to date have been SR3.5 billion ($935 million). While volumes on the Saudi market have declined, its relative size in turnover within the GCC has increased since 2008, as other markets (mainly Dubai/Abu Dhabi and Kuwait) have seen an even more pronounced drop-off in trading turnover. This has been partly due to the reduction in market size, but also due to some increase in investor aversion to exposure to the equity markets following the impact of Dubai World and other market specific issues. As of the second quarter of this year, the Saudi market accounts for about 75 percent of trading turnover in the GCC and in June 2010, the percentage was actually closer to 80 percent. This compares to about 60 percent in 2008 and 66 percent in 2009. The large decliners during this time are: • Kuwait, which fell from 16 percent in 2008 to closer to 10/11 percent in 2Q2010. • Dubai, which was near 10 percent in 2008 and has fallen below 6 percent by mid-2010. • Abu Dhabi, which has fallen from around 7 percent of turnover in 2008 to just 2 percent by mid-2010. Nonetheless, low liquidity remains a risk for the region, the report noted. “We believe the precipitous drop in trading turnover is a risk for the region as lower volumes could deter both retail and institutional investors from entering the market, leading to even lower volumes and thus compounding the problem,” the report said. TASI has held up relatively well in this regard, mainly due to the strong retail trading volumes, which seem to offer an underlying support level to the market. When comparing yearly turnover to market capitalization ratios, TASI has declined the most over time, but is still one of the most liquid markets in the region. Saudi market has about a 69 percent turnover ratio in 2010 to date compared to 49 percent for Kuwait, 13 percent for Abu Dhabi, and 19 percent for Qatar. Dubai at 74 percent looks relatively robust. Furthermore, the Saudi banking sector fundamentals remain sound, the report said. The second largest in the GCC after the UAE, is comprised of 12 commercial banks with total assets worth SR1.3 trillion. Even in the face of the global financial crisis, Saudi banks proved their resilience, thanks to conservative provisioning policies and a strong capital base. The domestic banks have strong financial ratios, with NPLs at less than 4 percent of gross loans, loan loss provisions nearing 90 percent, return on equity of 14 percent and return on assets of 2 percent. These factors, combined with the global economic rebound, are likely to accelerate growth in the Saudi banking sector, the report forecast. Increased lending to the private sector should become one of the growth drivers in 2010-2011. The Saudi banking sector retains considerable growth potential by global standards. Its loan-to-GDP ratio of 53.2 percent and deposit-to-GDP ratio of 67.8 percent indicate a tremendous room for convergence-type growth. Even as the financial crisis wreaked havoc across the global banking sector, Saudi banks have not been as negatively affected, given their minimal exposure to US sub-prime mortgages and SAMA's conservative approach, it said.
