JEDDAH — Although increased geo-political risk, mainly due to Iran, may support oil prices, increased shale oil production in the US, combined with increasing supplies from Iraq and the continued weakness in the global economy are likely to put downward pressure on the price of oil in the short term, according to the Saudi Economic review report by the NCB. In their monthly views on Saudi economic and financial developments, the report said that the inflation rate is expected to edge slightly higher during April and continue on an upward trajectory during the second quarter of 2013 as the food and beverage category represent a weight of 21.7% in the inflation index. The report added, given the cloudy projections about global economic growth, April witnessed a collapse in the price of commodities from copper to oil. The International Monetary Fund had even revised downwards its forecasts for global and regional growth. World economic growth this year was cut to 3.3% from 3.5%. The fact that this figure is way below the recovery witnessed in 2010 after the global economic crisis indicates the fragility of real growth drivers. The monetary situation in the largest economy in the GCC continues to represent the prosperous state of Saudi Arabia. The sustainable level of growth in the monetary system is in line with the fiscal expansionary policy while the extent of inflationary pressure remains subdued. A glance at Saudi Arabia's monetary aggregates in March reveals expanding liquidity, which could trickle down to the consumer by raising local prices, but that is not the case for the latter. The monetary base (M0) increased by 9.1% annually during March. The main contributors to the gain were; deposits with Saudi Arabian Monetary Agency (SAMA), currency outside banks, and cash in vault, all growing at an annual rate of 7.3%, 10.3%, and 16.3%, respectively. It said, the liquid state of the economy would continue to contribute to the growth of the financial system. The money supply (M3) undoubtedly has a positive correlation with M0. Consequently, M3 recorded a rise of 12.3% Y/Y by the end of March to reach an all-time high at SR1.43 trillion. Other quasi-monetary deposits managed to expand by 3.4% on a monthly basis, while registering a 6.6% Y/Y gain reaching SR174.1 billion, which is in line with the growth of Saudi's trade activities. As for inflation during March, the rate of inflation sustained the 3.9% Y/Y increase for the third consecutive month this year. It is expected that the anticipation of the mortgage law and the possibility of passing a new tax law on “white land”, has kept the real estate market on hold for the time being. The regulatory framework of the new law will unfold the direction of the real estate market, albeit having its full impact on the medium to long term. Capital markets saw the start of Tadawul reform, the report said, stating global equity markets managed to gain 2.6% last month according to the MSCI World index. Advanced economies made substantial gain, with US's Dow and S&P500 continuing their momentum into this month and recording all-time highs. Following the strong first quarter announcements from the market, Tadawul gained 0.8% during the month of April and continues on an upward trajectory, albeit slowly. The index has been hovering around the 7,100 level and it seems to be setting a new normal. The trajectory remains positive and we expect Tadawul to achieve 10-15% by the end of 2013. The majority of trading continues to be dominated by speculative investors as around 90% of trading is conducted by Saudi individuals. Non-Saudi trading represents around 5%, however; Abdulmalik Al-Shiekh, the Capital Market Authority (CMA) head, has recently reiterated the need for further foreign exposure in the local market. The decision will certainly develop the market and add depth, thus, breaking speculative pressures. The primary market concluded the month of April with no activity. However, the market is expecting two initial public offerings (IPO) this month, both in the insurance sector. Aljazira Takaful will be issuing 10.5 million shares, representing 30% of the company's capital, to the public. The share price has been set at the minimum limit, SR10, which will provide the company with SR105 million worth of funds. Additionally, Arab National Bank have partnered with American giants, AIG, to establish a cooperative insurance company which will offer 5.25 million shares at a price of SR10. The latter IPO will have the subscription phase push into June. Interestingly, the CMA has announced a 10% growth cap for first day listings. The report said the appetite for IPOs should remain the same, despite an expected reduction in oversubscription, with no pressure on underwriters. The report said that the loans market held a healthy balance. Saudi banks continue to support the macroeconomic conditions by providing the necessary financing for local businesses. The depositary base reached an all-time high at SR1.29 trillion, increasing 12.5% on an annual basis. The pace of growth has been stable and supportive of local banks' financing expansions. The majority of deposits are demand based with a share of 62.4% as they climbed 18.9% Y/Y during March. The combined loans portfolio for local banks reached an all-time high during March at SR1.04 trillion, a 15.8% gain over March 2012. The pace of credit growth in the Saudi economy continues to soften by recording the third consecutive deceleration. The current rate of growth is far below the exceptional levels seen in 2004- 2005 periods where annual growth reached near 40% or the 2007-2008 periods where rates reached as high as 34.9% Y/Y during August 2008. The report said, credit is likely to maintain the current trajectory as banks are still below SAMA's limitations and the economy remains robust and absorbent of excess financing. Sukuk is now the bellwether of the Islamic finance industry. As Shariah-compliant structures are becoming increasingly understood by stakeholders, and as the development of risk management tools is progressing; removing infrastructural rigidities, the global sukuk market has been gaining momentum in recent years. The negative impact of the crisis and the asset bubble burst in the GCC downsized the issuance to $20.6 billion in 2008. However, an exponential growth took place the following years, which resulted a spike in sukuk issuance worth $85.1 billion in 2011, surpassing pre-crisis levels. Last year, sukuk issuances reached $139.4 billion; a 63.8% growth over 2011. — SG
