Retail Sector Report - Al Rajhi Capital

Saudi Retail Sector
Retail –Industrial
05 January 2013
Saudi economy has benefited
from high oil prices and exports
for most of 2012
Retail is promising:
growing despite challenges
A strong economy moving away from oil
The MENA region is expected to remain one of the few bright spots for global GDP growth in
2012, even as the global economic recovery remains uncertain with a deepening financial
crisis in Europe and a slowdown in the US as well as emerging Asian markets like China and
India. According to the IMF’s update in July 2012, GDP growth in the MENA region will be
higher by 200bps y-o-y in 2012 at 5.5% vs. decline of 20bps (advanced economies) to 340bps
(Central and Eastern Europe), mainly due to higher oil production. As the global leader in oil
exports, Saudi Arabia has been a beneficiary of the high crude prices witnessed in the first
half of 2012. Although crude oil production from the Kingdom has moderated after it peaked
in June 2012 at 10.1mbpd, it continues to be at elevated levels.
Figure 1 Crude oil production are at elevated levels
mbpd
10.5
Figure 2 Smaller sectors are growing faster
40%
10.0
20%
9.5
9.0
0%
8.5
-20%
8.0
7.5
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12
Source: OPEC, Al Rajhi Capital
Source: Bloomberg, Al Rajhi Capital
Market Cap 1-year growth
Performance 1-year growth
The Saudi economy, with real GDP at SAR942bn in 2011, (source: IMF with 1999 as base
year) has been growing strong thanks to its rising oil exports even as countries in the
developed world continue to struggle. Although the IMF expects the Kingdom’s real GDP
growth to remain at moderate levels (6% in 2012 vs. 7% in 2011), it remains better than
developed economies and comparable to the emerging economies of Asia. Even at the
regional level, Saudi Arabia has remained relatively unscathed from the uprisings witnessed
in other countries in the MENA region. This is mainly due to the massive social spending
activities worth SAR1.4tn being carried out by the Saudi government over 2010-2014 as per
the ninth five-year development plan.
The Saudi government has
been using its export surpluses
for increased social spending
The Saudi government has allocated SAR250bn for building 500,000 new affordable housing
units for low income Saudis. A new Saudization program (Nitaqat) aimed at increasing the
employment of Saudi citizens in the private sector came into effect in late 2011, which has
been supported by job placement and training schemes. A decree was passed in 2011 to
increase the minimum wages for all public sector employees to SAR3,000 per month. Further,
in January 2012, an unemployment allowance (Hafiz) of SAR2,000 per month was
introduced, which the Ministry of Labor has estimated to cost around SAR5.5bn per annum
for the Saudi government. We believe this massive social spending will generate employment
opportunities leading to higher disposable income levels for Saudi citizens, which will
gradually trickle down to various sectors such as retail.
Apart from the social spending, the surpluses generated from oil exports are also being
ploughed back to diversify the country’s economy. This has led to the development of new
sectors such as agriculture, retail, and real estate which are growing at a faster pace as
compared to other bellwether sectors such as petrochemicals and banking. We view this as a
positive development for the long-term economic growth of the Kingdom. Although this may
indicate slower growth than in the past, it will pave the way for a much more vibrant and
diversified economy.
Disclosures Please refer to the important disclosures at the back of this report. 2