Economy

alrajhicapital

2ksZQUl

Saudi Arabian Economy

Economic Research

Monthly Economic Report

February 2017

Research Department

ARC Research Team,

Tel. +966 1 211 9370, devassyp@alrajhi-capital.com

Saudi Arabian Economy – Inflation slows

Inflation in December grew by the slowest pace at least since 2012, by 1.7%

y-o-y versus 2.3% y-o-y in November, mainly owing to the fall in food prices.

On a m-o-m basis, prices continued to fall with the index dropping by 0.5% in

December compared to November.

Total value of POS transactions declined 5.9% y-o-y in December 2016

compared to 3.0% y-o-y in November 2016, while ATM cash withdrawals

dropped by 4.5% y-o-y in December, higher than 2.2% y-o-y fall in November.

As per SAMA data, annual value of POS transactions fell by 4.7% in 2016, the

first drop since the publication of the data in 1993. Similarly, aggregate

annual ATM withdrawals fell by 3% in 2016, first time since 2013 indicating

the on-going weakness in consumer spending.

Non-oil private sector PMI expanded to 55.5 in December 2016, as

against 55.0 in November, backed by a rise in output.

Brent crude March futures declined 2.3% MTD in January 2017 (+8.2%

m-o-m in December 2016), as investors were concerned over the increase in

US shale oil production.

Real estate prices dropped 6.1% y-o-y in 2016, versus a yearly fall of 2.6%

in 2015, as per the new real estate price index published by GASTAT.

Loan-to-deposit ratio recorded its lowest mark in 11 months as Banks’

claims on the private sector rose at a slower pace of 2.4% y-o-y in December

(+4.4% y-o-y in November) while deposits grew marginally in December. On

an annual basis, credit growth to private sector slowed down to 2.2% in 2016,

compared to 9.8% in 2015 and last five years’ average growth rate of 12.3%.

Saudi Arabia’s foreign reserve assets dropped in December 2016, albeit

at a slower pace on a monthly basis. The Kingdom used around SAR 300bn in

2016 (SAR 435bn in 2015), mainly to plug fiscal deficit.

On the equity front, the TASI dropped 1.5% in January 2017, as compared

to a rise of 3.0% m-o-m in December 2016.

At the World Economic Forum, the Saudi Finance Minister stated that

the GDP growth is expected to be higher than 1% in 2017, as against 0.4%

revised by the IMF, largely due to the planned investments in renewable

energy coupled with a stimulus package for the private sector.

According to SAMA Governor, the banking system has adequate liquidity

and the central bank is unlikely to take any further steps to boost liquidity.

Saudi Arabia’s crude oil exports jumped to 8.26 mbpd in November

2016, recording its highest level since 2003. The exports rose by 8.14% m-om

in November, as against a monthly drop of 2.25% in October.

The banking sector’s monthly profits witnessed a sharp drop in

December 2016. The cumulative net profits for 2016 also declined vis-à-vis

2015, owing to an increase in provisioning charges. Moody’s stated that the

profits of the banking sector in the Kingdom are expected to remain muted in

2017, due to a rise in cost of risk and sluggish credit growth.

The Unified Agreement for VAT has been approved by the Kingdom,

which is expected to be implemented throughout GCC in 2018. The VAT on

certain goods is in line with the IMF recommendations to introduce new

revenue generating measures.

Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the

USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to

Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.


Economic Research

Monthly Economic Report

February 2017

OPEC members produced 33.085 mbpd in December, 0.22 mbpd lower compared to the

previous month. Saudi Arabia reported the largest decline in output. However, the cartel

stated that the US shale oil output may witness a rise owing to higher oil prices due to output

cuts.

Crude price outlook: The US Energy Information Administration (EIA) in its January

2016 report estimated Brent crude oil prices to average around US$53/barrel in 2017 and

US$56/barrel in 2018.

Figure 1: Real Estate Price Index

100

98

96

94

92

90

88

86

84

82

80

General Index Residential Commercial Agricultural

2015 2016

Source: GAS, Al Rajhi Capital

Figure 2: International Bond Yields

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

30 Yr 10 Yr 5 Yr

Source: Bloomberg, Al Rajhi Capital

Disclosures Please refer to the important disclosures at the back of this report. 2


Economic Research

Monthly Economic Report

February 2017

Figure 3: Key macro indicators

Variable Jan-17 Dec-16 Nov-16 2016* 2015

Inflation Rate (2007=100) - 1.7% 2.3% 3.5% 2.2%

Jan-17 Dec-16 Nov-16 2015 2014

Average Oil Price (Arab Light) (US$/Barrel) 51.3 51.9 43.3 49.9 97.2

Jan-17 Dec-16 Nov-16 2016 2015

Money Supply (M3) - 0.7% 0.1% 0.7% 2.6%

Total Banking Sector Claims - 9.1 11.3 9.1 10.5

Interbank Interest Rate (3 Month) 2.010 2.041 2.174 0.88 0.88

Repo Rate 2.00 2.00 2.00 2.00 2.00

Reverse Repo Rate 0.75 0.5 0.5 0.5 0.5

General Share Price Index (1985=1000) - 4.3 -3.3 4.3 -17.1

Q3 2016* Q2 2016* 2016* 2015

GDP Rate at Constant Prices (2010=100) - 0.9% 1.4% 1.4% 4.1%

Q3 2016* Q2 2016* 2015** 2014

Current Account to GDP Ratio (current prices) - 1.3% -4.4% -8.7% 9.8%

Total Imports (fob) to GDP Ratio (current prices) - 16.1% 20.9% 24.4% 21.0%

Non-oil Exports to GDP Ratio (current prices) - 6.0% 7.6% 7.8% 7.7%

Source: SAMA, * Provisional, **Revised, Arab light and Interbank interest rate data are as on 26 th January 2017.

Figure 4: Global Crude Oil Exporters

Mbpd

6

5

4

3

2

1

0

Figure 5: Gulf Crude Oil Exporters

Mbpd

9

8

7

6

5

4

3

2

1

0

Russia Canada Norway Mexico

Source: JODI, Al Rajhi Capital. November data for Russia not released.

Iraq Kuwait Iran Saudi Arabia

Source: JODI, Al Rajhi Capital. November data for Kuwait and Iran not released.

Kuwait’s exports for Feb 2015 and May 2016 have been assumed as their respective previous

months, owing to unavailability of data.

Figure 6: Saudi crude oil production trend – Crude oil output grew

by 2.2% y-o-y in December 2016, as compared to a rise of 1.9% y-o-y

in November.

Figure 7: Crude oil prices trend – Crude oil prices (Brent March futures

contract) dropped 2.3% MTD in January 2017 (+8.2% m-o-m in December

2016), as investors were concerned over the rise in US shale-oil output.

10.8

10.6

10.4

10.2

10.0

9.8

9.6

9.4

9.2

9.0

8.8

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

-2.0%

-4.0%

-6.0%

70

65

60

55

50

45

40

35

30

25

20

Source: Bloomberg, Al Rajhi Capital

Saudi Crude oil production

YoY growth

Source: Bloomberg, Al Rajhi Capital

Brent WTI Arab Light

Disclosures Please refer to the important disclosures at the back of this report. 3


Economic Research

Monthly Economic Report

February 2017

Figure 8: Non-oil export trend (y-o-y) – Non-oil exports fell 9.1% y-

o-y in November 2016 (-2.8% y-o-y in October), due to the drop in

chemical products and transport equipment segments which constitute

33.8% of the total exports.

YoY

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%

-10.0%

-20.0%

-30.0%

-40.0%

Figure 9: Non-oil import trend (y-o-y) – Non-oil imports dropped 22.3%

y-o-y in November 2016, led by machinery & electrical and transport

equipment segment which account 43.0% of the total imports.

YoY

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%

-10.0%

-20.0%

-30.0%

-40.0%

-50.0%

Source: GAS, Al Rajhi Capital

Non-oil Export

Source: GAS, Al Rajhi Capital

Non-oil Import

Figure 10: Non-oil exports

Commodities (SAR mn) Sep-16 Oct-16 Nov-16 % y-o-y % m-o-m

Plastics & Rubbers 3,359 5,057 4,948 6.9% -2.2%

Chemical Products 2,444 3,971 3,608 -23.9% -9.1%

Ordinary Metals 730 1,210 1,218 -2.8% 0.7%

Transport Equipments 1,065 1,521 1,257 -30.8% -17.4%

Others 2,282 3,230 3,366 -1.1% 4.2%

Total 9,880 14,989 14,397 -9.1% -3.9%

Source: GAS, Al Rajhi Capital

Figure 11: Non-Oil Imports

Commodities (SAR mn) Sep-16 Oct-16 Nov-16 % y-o-y % m-o-m

Machinery & Electricals 7,296 9,730 10,408 -26.6% 7.0%

Transport Equipments 5,957 7,790 6,701 -35.9% -14.0%

Ordinary Metals 2,913 3,786 3,229 -26.7% -14.7%

Chemical Products 2,644 3,883 3,657 -20.0% -5.8%

Others 12,143 15,130 15,762 -10.1% 4.2%

Total 30,953 40,319 39,757 -22.3% -1.4%

Source: GAS, Al Rajhi Capital

Disclosures Please refer to the important disclosures at the back of this report. 4


Economic Research

Monthly Economic Report

February 2017

Figure 12: Money supply growth (y-o-y) – Broader money supply

(M3) grew by the fastest pace since January 2016, by 0.7% y-o-y in

December, to stand at SAR 1,787bn.

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%

-15.0%

Figure 13: Deposits break-up – Time & saving deposits rose at a

slower yearly pace in December as growth in government sector

saving slowed, while demand deposits remained almost stable.

SAR bn

1,200

1,000

800

600

400

200

0

M1 M2 M3

Time and Saving Deposits

Demand Deposits

Source: SAMA, Al Rajhi Capital

Source: SAMA, Al Rajhi Capital

Figure 14: Credit and deposit growth – Private sector credit grew at

the slower annual rate in December 2016, as the government paid

back the arrears to the private sector, thereby curbing the need to

extend credit lines.

Figure 15: Loans to deposits – The loan-to-deposit ratio fell to

86.6% in December 2016, its lowest reading since January 2016.

YoY

20.0%

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%

92%

90%

88%

86%

84%

82%

80%

78%

76%

74%

72%

Deposits

Credit

Loans to Deposit ratio

Source: SAMA, Al Rajhi Capital

Source: SAMA, Al Rajhi Capital

Figure 16: Non-performing loans

3.0

2.0

1.0

0.0

-1.0

-2.0

-3.0

-4.0

-5.0

-6.0

-7.0

Figure 17: Net Profit for Banks

SAR mn

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

-

Net Non- performing loans to capital

Nonperforming loans to total gross loans

Source: SAMA, Al Rajhi Capital. Q4 2016 data not released yet.

Source: SAMA, Al Rajhi Capital

Disclosures Please refer to the important disclosures at the back of this report. 5


Economic Research

Monthly Economic Report

February 2017

Figure 18: Foreign reserves – Dropped at the slowest yearly pace

since October 2015, to stand at SAR 2,012bn (~US$536.5bn) in

December 2016.

SAR bn

3,000

2,500

2,000

1,500

1,000

500

0

20.0%

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%

-15.0%

-20.0%

Figure 19: Major components of foreign assets – Foreign deposits

abroad rose on a m-o-m basis for the first time in seven months in

December, while the investments in foreign securities dropped further

in December.

SAR bn

2,500

2,000

1,500

1,000

500

0

Foreign Reserves Assets

YoY

Foreign Currency & Deposits Abroad

Investment in Foreign Assets

Source: SAMA, Al Rajhi Capital

Source: SAMA, Al Rajhi Capital

Figure 20: Inflation trend (y-o-y) – The general index of cost of living

rose at the slowest pace in more than 10 years, by 1.7% y-o-y in

December 2016, backed by a fall in food prices.

Figure 21: Inflation drivers (y-o-y) – Food & beverages prices dropped

4.3% y-o-y in December 2016, as compared to a fall of 2.6%y-o-y in

November 2016.

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

-2.0%

-4.0%

-6.0%

General Index

Food And Beverages

Transport

Furnishings, Household

Housing, Water, Electricity, Gas

Source: GAS, Al Rajhi Capital

Source: GAS, Al Rajhi Capital

Figure 22: Tadawul index performance

Index

7300

Million

350

Figure 23: TASI one year historic 12-month forward P/E chart

15.0x

7200

7100

7000

6900

6800

6700

6600

300

250

200

150

100

50

0

14.0x

13.0x

12.0x

11.0x

10.0x

9.0x

8.0x

Volume RHS

TASI

Source: Bloomberg, Al Rajhi Capital, Data from 29th December 2016 to 29th January 2017.

Source: Bloomberg, Al Rajhi Capital

Disclosures Please refer to the important disclosures at the back of this report. 6


Economic Research

Monthly Economic Report

February 2017

Figure 24: Top 5 Sectors MoM

Figure 25: Bottom 5 sectors MoM

9.0%

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

0.0%

-2.0%

-4.0%

-6.0%

-8.0%

-10.0%

-12.0%

Source: Tadawul, Al Rajhi Capital. MTD returns for January 2017. Source: Tadawul, Al Rajhi Capital. MTD returns for January 2017.

Figure 26: Top 5 Gainers for the month of January

Name

Monthly Return Market Cap (SAR bn) Avg Volume (mn) Sector

Arabian Shield Cooperative Insurance Co 53.6% 1.24 1.44 Financials

Umm Al-Qura Cement Co 26.3% 1.25 1.15 Materials

Saudi United Cooperative Insurance Co 20.3% 1.08 1.63 Financials

Knowledge Economic City Co 11.4% 6.82 0.91 Real Estate

Jarir Marketing Co 10.9% 11.52 0.08 Consumer Discretionary

Source: Bloomberg, Al Rajhi Capital, Companies with market cap more than SAR 1bn. MTD returns for January 2017.

Figure 27: Top 5 Losers for the month of January

Name Monthly Return Market Cap (SAR bn) Avg Volume (mn) Sector

National Medical Care Co -16.2% 2.48 0.27 Healthcare

Saudi Ground Services Co -15.1% 10.56 0.24 Industrials

Arabian Cement Co/Saudi Arabia -14.8% 3.81 0.37 Materials

Yanbu Cement Co -12.0% 5.61 0.17 Materials

Fawaz Abdulaziz Al Hokair & Co -11.9% 6.81 0.59 Consumer Discretionary

Source: Bloomberg, Al Rajhi Capital, Companies with market cap more than SAR 1bn. MTD returns for January 2017.

Figure 28: Point-of-sale transactions (POS) trend – Point-of-sale

(POS) transactions dropped in December 2016, on a yearly basis, for

the second straight month.

Figure 29: ATM cash withdrawals trend – ATM cash withdrawals

declined 4.5% y-o-y in December, as against a yearly drop of 2.2% in the

previous month.

SAR bn

20.0

50%

SAR bn

80.0

50%

18.0

16.0

14.0

12.0

40%

30%

20%

70.0

60.0

50.0

40%

30%

20%

10.0

10%

40.0

10%

8.0

6.0

4.0

2.0

0%

-10%

-20%

30.0

20.0

10.0

0%

-10%

-20%

-

-30%

-

-30%

POS

YoY

ATM Cash withdrawals

YoY

Source: SAMA, Al Rajhi Capital

Source: SAMA, Al Rajhi Capital

Disclosures Please refer to the important disclosures at the back of this report. 7


Economic Research

Monthly Economic Report

February 2017

Figure 30: Emirates NBD Saudi PMI Index: Saudi’s non-oil private

sector PMI expanded to 55.5 in December 2016 (55.0 in November),

owing to a rise in output.

Figure 31: Consumer spending trend (POS and ATM cash

Withdrawals)

64

62

60

58

56

54

52

50

SAR bn

80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

-

48

POS

ATM Cash withdrawals

Source Bloomberg, Al Rajhi Capital. Data for January 2017 not released yet.

Source: SAMA, Al Rajhi Capital

Disclosures Please refer to the important disclosures at the back of this report. 8


Economic Research

Monthly Economic Report

February 2017

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Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research

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Disclosures Please refer to the important disclosures at the back of this report. 9


Economic Research

Monthly Economic Report

February 2017

Disclaimer and additional disclosures for Economic Research

Disclaimer

This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared

for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or

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not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to

public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be

reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the

data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free

from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the

information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment

products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account

the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document.

Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or

investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may

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of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or

income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its

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Disclosures Please refer to the important disclosures at the back of this report. 10

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