SAUDI ARABIA 2019 OUTLOOK January 2019 Tel: +966 11 218 6666 | Fax: +966 11 218 6668 | Toll Free Number: 800-12-63342 | 7758 King Fahad Road-Office 1 Riyadh 4187-12333 Saudi Arabia | www.mefic.com.sa | CMA License Number: 06029-37 CR: 1010237038 | CCR: 184700 @mefic MEFIC MEFIC Capital Disclaimer: “Saudi Arabia 2019 Outlook” has been prepared and issued by MEFIC Capital a CMA, Saudi Arabia regulated entity. This Report is intended to be circulated for general information only. The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. For further information, please contact at Email: investmentresearch@mefic.com.sa
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CR: 1010237038 | CCR: 184700 @mefic MEFIC MEFIC Capital
Disclaimer: “Saudi Arabia 2019 Outlook” has been prepared and issued by MEFIC Capital a CMA, Saudi Arabia regulated entity. This Report is intended to be circulated for general information only. The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. For further information, please contact at Email: [email protected]
SAUDI ARABIA 2019 OUTLOOK | January 2019 P a g e | 2
Table of Content
A. Executive Summary .......................................................................................................................... 3
B. Saudi Economic Outlook 2019 ....................................................................................................... 7
C. Equities outlook ............................................................................................................................... 13
D. Real Estate Sector Outlook ........................................................................................................... 20
E. Private Equity Outlook.................................................................................................................... 24
F. Conclusion ....................................................................................................................................... 27
G. Annexure 1: Chart Pack ............................................................................................................... 28
I. Macroeconomic Indicators ....................................................................................................... 29
II. Oil Indicators ................................................................................................................................ 35
III. Stock Market Indicators ............................................................................................................ 36
IV. Corporate earnings .................................................................................................................. 37
V. Tadawul Sector Earnings Performance .................................................................................. 38
H. Annexure 2: Saudi Arabia Key Statistics ..................................................................................... 39
Executive Summary
SAUDI ARABIA 2019 OUTLOOK | January 2019 P a g e | 3
A. Executive Summary Key factors Key positives Key Risks Outlook
Economic
Outlook
GDP Growth
Oil Prices
Oil Production
Fiscal policy
Credit growth
Monetary policy
Fiscal Deficit
Large government
spending
GDP growth on the rise
Fiscal deficit under control
Room to raise debt and
preserve forex reserves
Impact of expat exodus
may affect select
consumption segments
Production cut deal
collapse
Faster interest rate
increases
Ca
utio
usl
y P
osi
tive
Equities
Outlook
Earnings growth
MSCI /FTSE inclusion
Trading volumes
Dividend yield
Valuations
Construction related
sectors to benefit from
government spending
Attractive valuations
Privatization program may
lead to few initial offerings
Slower increase in foreign
investor interest
Subdued sentiment
towards emerging market
equity markets
Po
sitiv
e
Real Estate
Outlook
Demand Supply Balance
Occupancy levels
Rent growth
Economic Outlook
Government support
Government incentives for
affordable housing to
increase supply and
encourage demand
Rising rates
Rents stagnation
Lon
g t
erm
Po
sitiv
e
Private
Equity
Outlook
Number of funds
Sector diversification
Real Estate PE fund
subscription
Exit via NOMU
Demand for private
capital
Economic revival and
government’s privatization
program leading to
greater investor interest in
Private Equity funds
Increased interest in other
sector funds such as
Education and Healthcare
Fall in subscribers in real
estate funds
Markets still overcrowded
with several funds chasing
limited opportunities
Lon
g t
erm
po
sitiv
e
Executive Summary
SAUDI ARABIA 2019 OUTLOOK | January 2019 P a g e | 4
Executive Summary
The year 2018 was a study in contrast for Saudi Arabia. On the domestic front, economic activity
improved led by government spending and credit growth from private sector. On the global front, fall
in oil prices during the final quarter of the year and sell-off in both developed and emerging equity
markets marked a return of volatility. Again, on the domestic front, Saudi Arabia’s reforms program
continued on track and received a boost from FTSE and MSCI inclusion, thereby setting up greater
foreign investor participation and further progress in terms of diversification of the economy. During the
year, the government accelerated the privatization program, with sectors like healthcare and
education to be among the key focus sectors. During the year, development projects announced
across the country would help to sustain economic growth. On the international front, Saudi Arabia led
the OPEC and allies in announcing production cuts in response to the sharp fall in oil prices. The strategy
has been successful in rebalancing the demand supply situation in the recent past, and the ‘OPEC +
allies’ group of oil producers are expected to be responsive to rein in oversupply again by either
deepening or extending the production cuts. Overall, 2019 is expected to be a year of continued
economic growth for Saudi Arabia and a year of consolidation for the markets.
Economic performance improves in 2018
The year 2018 witnessed a revival in economic
growth for Saudi Arabia. Several
macroeconomic indicators improved –
quarterly GDP growth moved up to 2.5% in Q3
2018 (Figure 1, Annexure 1), consumer inflation
revived to 2.8% by November (Figure 5,
Annexure 1), credit growth improved to 2.2%
(Figure 20, Annexure 1) after shifting to positive
growth during the year, Point of Sales (PoS)
transactions (Figure 38, Annexure 1) and ATM
withdrawals averaging a growth of 16.5% YoY
and 3.3% YoY respectively up to November
2018 and similar other macroeconomic
indicators. As we had expected in our 2018
Outlook report, increased government
spending has had a beneficial effect on the
Saudi economy. The surge in oil prices during
first nine months of 2018 also had a positive
effect on fiscal balances, with the government
lowering the target for 2018, and having room
to spend. However, oil markets fell sharply in the
last few months of 2018 over global growth
concerns, higher US shale output and surprise
exemption from Iran oil sanctions to eight
countries by US administration. The year 2019
has begun on a positive note, with oil prices
rallying from the bottom, signs of US China trade
war resolving through talks and the US Fed
signaling patience in further rate hikes. The
International Monetary Fund (IMF) has
indicated its estimate of GDP growth for Saudi
Arabia as 2.4% (Figure 2, Saudi Economic
Outlook 2018 section).
Equity markets attractive at current valuations
Equity market in Saudi Arabia witnessed a
volatile year in 2018. During the year, as
expected in our 2018 Outlook report, FTSE and
MSCI announced inclusion of Tadawul in their
respective equity indices, thereby paving the
way for higher foreign investor participation.
Further, as Saudi economic performance
improved and oil prices increased Saudi equity
markets followed the positive ques. However,
towards the end of the year, a globally
synchronized fall in equity markets, led by
concerns of slowing global economic growth,
slowing global trade, fall in oil prices and
concerns of emerging markets led to a sell-off in
Saudi equities. Specific sectors such as food
and retail were also affected by the exodus of
expats affecting consumption in specific
Executive Summary
SAUDI ARABIA 2019 OUTLOOK | January 2019 P a g e | 5
segments, which was partly offset by the
continued support of Saudi government in
terms of special allowances, citizens account
program as well as policy changes in housing
sector. The plan for continued government
spending in 2019 (Figure 3, Saudi Economic
Outlook 2018 section) and rising oil prices in
early January, as well as more attractive
valuations have created an attractive
opportunity for Saudi Arabian equities. The
economy has had a whole year to acclimatize
to the Value Added Tax (VAT), fuel and
electricity price increases and expat fees,
which should help the consumption sector
(beneficiaries – retail, food and beverages).
Continued focus of the government in
infrastructure creation is expected to benefit
the construction sector and allied sectors such
as cement, as the project orders for large
projects such as NEOM start to roll out in latter
half of 2019.
Real Estate market to flourish in long term
Saudi real estate sector’s long term outlook
remains positive despite lower oil prices and
shortage of construction workers. Saudi Arabian
Monetary Authority (SAMA) increased the loan
to value ratio to 90% in January 2018 to bolster
the residential property market in the kingdom.
The government is promoting the private
sector’s participation in the country. A draft law
to regulate partnerships between the public
and private sectors was published in July 2018.
The emergence of social reforms including
opening of cinema market in the country could
revive shopping malls, which would drive
demand for retail real estate. Smart cities like
NEOM and King Abdullah Economic City would
drive the demand for commercial real estate.
The construction sector appears set for
expansion in 2019 as economic diversification
efforts gathers pace.
Private Equity market continues to diversify in
terms of sector focus
Saudi Private Equity space continues to gain
traction along with rest of economy, in sectors
other than real estate. Private equity investors
are increasing fund raising and seeking
investment deals in specific sectors - such as
healthcare, education predominantly – which
have long term demographic drivers and are
expected to benefit from government’s
privatization drive. Part of the privatization
program announced (to raise SAR 35 bn to 40
bn by 2020) will be through asset sales in sectors
such as education, water, telecommunications
and health care. While part of the sales will be
through initial offerings, some of them are
expected to be through private sales. In case
of infrastructure assets, the government aims to
follow the Public Private Partnerships (PPP) deal
route. Several multinational financial institutions,
such as Citi, have announced plans to acquire
a full banking license, which can lead to their
entry in the private equity space too. However,
in contrast to the overall development, funds
focused on real estate appear to be losing
investor interest, as is visible from fall in number
of subscribers to such funds, based on CMA
data.
Key risks to watch
Notwithstanding the positive developments and
prospects, the Saudi Arabian markets will also
face key risks. Actual government spending
during the year needs to match the
announced allocations. Consumers, at least the
Saudi citizens need to respond positively to
government’s special allowances and
incentives by spending, instead of higher
savings in the wake of increased fuel and
electricity prices. Reduction in expat population
post the introduction of expat fees also reduces
consumer base. The US Federal Reserve, in spite
of indicating patience in terms of rate hikes,
Executive Summary
SAUDI ARABIA 2019 OUTLOOK | January 2019 P a g e | 6
may respond to faster wage growth by
increasing the number of rate hikes from two in
2019 and beyond, SAMA will follow suit to
maintain the peg, thereby raising domestic
rates. Global growth concerns, faster
production from US shale oil and demand
supply imbalance in oil markets affect the price
of oil and consequently sentiment about Saudi
Arabia markets.
Saudi Economic Outlook 2019
SAUDI ARABIA 2019 OUTLOOK | January 2019 P a g e | 7
B. Saudi Economic Outlook
2019 Factors Negative Neutral Positive Outlook
GDP Growth C
au
tio
usl
y p
osi
tiv
e
Oil Prices
Oil Production
Fiscal policy
Credit growth
Monetary policy
Fiscal Deficit
Saudi Economic Outlook 2019
SAUDI ARABIA 2019 OUTLOOK | January 2019 P a g e | 8
Saudi Economic Outlook 2019
Saudi Arabia’s Economy revives in 2018
Saudi Arabia’s GDP growth was on a path of revival in 2018, after a contraction of 0.7% in 2017. By the
end of the first three quarters of 2018, the real GDP grew by 1.7% YoY, with the non-oil sector growing by
2.0% YoY and the oil sector by 1.4% YoY. Saudi Ministry of Finance expects the economy to deliver an
estimated GDP growth rate of 2.3% by the end of the year. The GDP growth estimate for 2018 was
revised up from 2.1% previously estimated in the pre-budget statement released in October 2018.
Figure 1: KSA Quarterly GDP Growth – Total and Non-oil (% YoY)
Source: General Authority of Statistics
Private consumption related indicators also showed an improved performance in 2018 compared to
the last year, with Point of Sales (PoS) transactions and ATM withdrawals averaging a growth of 16.5%
YoY and 3.3% YoY up to November 2018, as per the monthly data released by SAMA. Bank credit
growth has returned to positive territory since May 2018, after a period of contraction lasting more than
a year. Bank credit to the private sector achieved a growth of 2.3% YoY in November 2018, the highest
since the beginning of year, after showing consistent incremental improvement during the previous six
months. The Purchasing Managers Index (PMI) averaged 53.7 points in 2018 up to November, lower
than the average of 56 during the same period in 2017; mainly due to the negative impact of Value
Added Tax (VAT) and reforms in fuel and electricity prices implemented since the start of 2018.
However, the PMI improved during the latter part of 2018, averaging 54.6 for the last six months, and
reaching 11-month high of 55.2 in November 2018, reflecting improved sentiments in non-oil private
sector.
In 2018, inflation rose by an average of 2.5% YoY up to November 2018, compared to de-growth of
0.8% YoY during the same period last year. Inflation rates were largely affected by VAT and fuel price
reforms implemented at the start of the year. The Ministry of Finance expects inflation to grow at an
average of 2.6% YoY by the end of 2018, compared to de-growth of 0.8% in 2017.
The Saudi government expects KSA’s GDP growth to reach 2.6% in 2019, mainly driven by 20% YoY
increase in capital expenditure and private sector reforms. The IMF and the World Bank estimates for
KSA’s 2019 GDP growth are slightly lower, at 2.4% and 2.0% respectively. However, these estimates are a
significant improvement over those made at the start of the year. The government has announced that
(2) - 2 4 6 8
10 12 14
Q1
20
12
Q2
20
12
Q3
20
12
Q4
20
12
Q1
20
13
Q2
20
13
Q3
20
13
Q4
20
13
Q1
20
14
Q2
20
14
Q3
20
14
Q4 2
014
Q1
20
15
Q2
20
15
Q3
20
15
Q4
20
15
Q1
20
16
Q2
20
16
Q3
20
16
Q4
20
16
Q1
20
17
Q2
20
17
Q3
20
17
Q4
20
17
Q1
20
18
Q2
20
18
Q3
20
18
Total GDP % YoY Non-Oil GDP % YoY
Saudi Economic Outlook 2019
SAUDI ARABIA 2019 OUTLOOK | January 2019 P a g e | 9
it would introduce privatization programs and capital expenditure projects to boost the private sector,
in which the Public Investment Fund (PIF) would play a key role.
Figure 2: Saudi Arabia’s Annual GDP Growth (%)
Source: General Authority for Statistics, the World Bank, IMF
We expect the increased expenditure in 2019 to support the growth in non-oil sector. The extension of
cost of living allowances for one year would support consumer spending as well. The negative effect of
VAT and reforms in fuel and electricity prices on consumer spending and private sector growth would
be significantly reduced in 2019 as compared to 2018; taking into account the absence of low base
effect experienced in 2018, and also due to the fact that consumers and corporates would be more
acclimatized to these changes.
Increased government spending to boost economic growth further in 2019
The government is pursuing an expansionary spending policy in 2019, aimed at boosting non-oil
economic growth, speeding up the implementation of Vision 2030 initiatives and projects and
strengthening the efficiency of social benefits spending. The budget for 2019 was the largest-ever for
Saudi Arabia, with public expenditure rising 7.3% YoY to SAR 1,106 bn. The increased expenditure would
be mainly driven by 20% YoY increase in capital expenditure, reaching SAR 246 bn, which would be
directed towards infrastructure development and improvements in the quality of government services,
under the Vision 2030 program.
Figure 3: Estimated 2018 Expenditure vs. 2019 Expenditure (SAR bn)
Source: Ministry of Finance, E-Estimate
5.4
2.7
3.7 4.1
1.7
-0.7
Ministry of Finance,
2.6
5.4
2.7
3.7 4.1
1.7
-0.7
The World Bank, 2.0
5.4
2.7
3.7 4.1
2.3
-0.7
IMF, 2.4
-1
0
1
2
3
4
5
6
2012 2013 2014 2015 2016 2017 2018 2019E
474.0 456.0
140.0 175.0 17.0 21.0
90.0 108.0 106.0
100.0
205.0 246.0
0
200
400
600
800
1000
1200
2018 2019ECompensation of Employees Use of Goods and Services Financing Expenses
Social Benefits, Subsidies, Grants Other Expenses Non-Financial Assets (Capital)
Saudi Economic Outlook 2019
SAUDI ARABIA 2019 OUTLOOK | January 2019 P a g e | 10
Operational expenditure is expected to be SAR 860 bn (+4% YoY) or 77.8% of the total expenditure in
2019. Expenditure on goods and services is expected to grow by 25.5% YoY in 2019 to SAR 175 bn,
driven by spending on Vision Realization Programs, accounting for 20.4% of total operational
expenditure. Another important contributor to the operational expenses would be the royal decree
issued by King Salman to extend the monthly cost of living allowances to citizens under Citizens
Account Program (announced at the start of 2018) for one year. These allowances include: a monthly
cost of living allowance of SAR 1,000 for the government staff and military personnel; a monthly
allowance of SAR 500 for to pensioners and beneficiaries of social security system; and a 10% increase
in the stipend paid to students. Overall, social benefits’ spending is set to increase 20% YoY to SAR 108
bn. However, employee compensation, by far the largest component of the operational expenses
(53%), is set to decrease 3.8% YoY.
In terms of sectoral allocation of budget, military and security remain the sector with largest allocation
(27% of the total budget). However, the expenditure on the sector reduced 9% YoY. Spending on
education is also set to reduce, by 6% YoY. Spending on all the other sectors is set to increase, with
allocations for key sectors such as General Items, Infrastructure & Transportation and Economic
Resources increasing 57% YoY, 28% YoY and 24% YoY respectively.
Figure 4: Budget allocation (Segment wise)
Source: Ministry of Finance, E-Estimate
Total revenue is estimated to increase 9% YoY to SAR 975 bn in 2019, driven by 9% YoY rise each in oil
revenue (SAR 662 bn) and non-oil revenue (SAR 313 bn). The expat levy revenue is forecasted to
double to SAR 56.4 bn in 2019 from SAR 28 bn in 2018. Meanwhile, VAT revenue in 2019 is projected at
SAR 47 bn (2018: SAR 45.6 bn).
324
205 159
106
100
55
54 27 294
193
172
131
156
70
62 28
Military and Security Education Health and Social Development
Economic Resources General Items Infrastructure and Transport
Municipality Services Public Administration
2018
2019E
Saudi Economic Outlook 2019
SAUDI ARABIA 2019 OUTLOOK | January 2019 P a g e | 11
Figure 5: Revenue breakup (SAR bn)
Source: Ministry of Finance, E-Estimate, F-Forecast
The fiscal deficit for 2019 is aimed at SAR 131 bn or 4.2% of GDP, which is 3.7% lower than the expected
2018 deficit of SAR 136 bn (4.6% of GDP). The government would continue the policy of financing the
fiscal deficit through a combination of raising debt and using reserves. Total public debt is estimated to
reach SAR 678 bn by the end of 2019 (21.7% of GDP); while total government reserves are expected to
reach SAR 496 bn (15.9% of GDP).
Figure 6: Annual Fiscal Balance (SAR bn)
Source: Ministry of Finance, E-Estimate, F-Forecast
As per the monthly data released by SAMA, bank credit growth has returned to positive territory since
May 2018, after a period of contraction lasting more than a year. With the US Fed indicating that it
would slow the pace of monetary tightening for next year, this augurs well for the Saudi economy as
SAMA follows the Fed in monetary policy. We expect continued positive credit growth in 2019.
Volatility in oil prices a key concern for Saudi economy
Despite the projected growth in non-oil economy, and the government’s efforts to diversify its sources
of income, oil still remains the major component of the government revenue, with estimated oil
revenues making up 68% of the total revenues estimated for 2019. Therefore, fluctuations in global oil
prices have a significant impact on the fiscal performance and overall economy of Saudi Arabia.