Saudi Economic Reforms on Track

The government announced an increase in gasoline prices , part of the economic reforms post the hike in electricity tariff, introduction of VAT, and citizen account program, affirming its commitment on fiscal balance program and Vision 2030.

Economic indicators appear to be stable with SAMA data showing that reserve assets grew marginally in November (+0.2% m-o-m), rising for the second consecutive month, according to the Al Rajhi Capital’s monthly economic report.

Meanwhile, credit to the private sector was broadly flat (-0.3% m-o-m), while lending to the government entities grew (+2.3% m-o-m). Total deposits slipped marginally (-0.1% m-o-m) due to decline in time & saving deposits, even while demand deposits grew. As a result, LDR ratio eased to 82 (October: 82.46).

POS transactions grew 10.1% y-o-y due to lower spending last year on account of the cut in public sector allowances.

Cost of living rose for the first time in 11 months (+0.1% y-o-y). Inflation is likely to rise further in coming months on the back of the low base of last year, the announced hike in electricity prices, fuel prices and implementation of VAT.

The 2017 preliminary real GDP data showed that the economy contracted 0.74% y-o-y, mainly due to the cut in oil production, even though the non-oil growth accelerated (+1.01% y-o-y).

The trend in non-oil economy is expected to continue with the government announcing its biggest ever budget for 2018, increasing spending to SR 978bn, 5.6% higher than the expenditure (prelim.) in 2017.

Hike in gasoline prices saw the government increasing the prices of gasoline effective Jan 1, 2018. In-line with the fiscal balance program objectives, the gasoline prices were hiked to ensure rationalization of the consumption.

Octane-91 prices was hiked to SR1.37/L (up 83% from SR0.75 earlier) and Octane-95 prices was hiked to SR2.04/L (up 127% from SR0.90 earlier). The prices are inclusive of VAT, which again is effective from Jan 1, 2018. However, the diesel and kerosene prices were not hiked, which mainly have applications in industrial usage and commercial transportation.

Though this could weaken consumption, this was expected and should reaffirm government’s resolve to on driving the growth of non-oil economy.

Kingdom announced the 2018 budget, which stated that it would slow the pace of austerity measures and increase government spending.

The government plans to spend SR978bn in 2018 compared to SR890bn planned for 2017 (SR 926bn is the actual spending in 2017). Further, Kingdom pushed the target for balanced budget from 2020 to 2023.

Kingdom’s 2017 real GDP (preliminary) figures showed that the economy contracted 0.74% y-o-y (+1.67% y-o-y in 2016), primarily due to a 2.97% decline in oil sector because of production cut in compliance with OPEC agreement.

On the other hand, the non-oil sector growth accelerated to 1.01% y-o-y, compared to 0.23% y-o-y growth in 2016. Within the non-oil sector, private sector (70% of real non-oil GDP) grew by 0.7% while government sector (which composed rest 30% of the non-oil GDP) grew 1.7%.

Saudi Arabia’s Current Account Balance registered a surplus in Q3 2017 to stand at $10.0bn (SR37.5bn) after registering a deficit in the previous quarter.

SAMA total reserves grew on a sequential basis in November 2017, for the second consecutive month.

Meanwhile, the deposits slipped 1.5% y-o-y (-0.1% m-o-m), whereas credit to the private sector dropped 0.8% y-o-y in November (-0.3% m-o-m).

Government reserves with SAMA stood at SR629.2bn (including government current account), as of November 2017 recording a 4.0% monthly drop. We expect it to continue to decline to cSR596bn.

Kingdom raised SR4.78bn via domestic sukuk sale. The government raised SR2.4bn of 5 year bonds, SR1.8bn of 7 year bonds and SR575mn of 10 year bonds. The issue received SR10.325bn orders.

Point-of-sale (POS) transaction grew 10.1% y-o-y in November, versus the rise of 15.0% y-o-y in October, owing to the low base since October last year caused by the cut in public sector employee salaries and allowances.

However, the ATM transactions dropped 2.3% y-o-y in November 2017 as against +1.3% y-o-y in October. Banking sector profits climbed 13.7% y-o-y in November 2017 to SR3.7bn. The sector’s cumulative profits totaled to SR41.1bn by November 2017, a rise of 4.5% y-o-y.

Crude oil prices (Brent February futures contract) jumped 7.0% MTD in December 2017, owing to supply disruptions in Libya and the North Sea coupled with higher demand from China.

Kingdom’s non-oil exports rose by 13.1% y-o-y in October 2017, compared to the fall of 2.1% y-o-y in September, while the non-oil imports increased 2.3% y-o-y in October 2017, after dropping for two consecutive months.

Cost of living index entered the positive territory for the first time in almost a year in November 2017 at +0.1% y-o-y. The rise can be attributed to the lower drop in ‘Food & Beverage’, ‘Furnishings, Household Equipment & Maintenance’ and ‘Transport’ sectors.

On a sequential basis the index edged up after a brief fall in the previous month.

Crude price outlook: The US Energy Information Administration (EIA) in its December 2017 report estimated Brent crude oil prices to average around $54/barrel in 2017 and $57/barrel in 2018