In the latest update of Jadwa Investment on the Kingdom's economy, it said that a “sustainable recovery” will take hold in the fourth quarter based on the assumption that external conditions will continue to improve, “barring any other major public financial events at family businesses.” It said that global recession hit hard through the early part of 2009 and as the external environment began to improve local business confidence was set back by high-profile troubles at two local companies. However, recent data suggest that the “worst is now over for the economy and based on our assumption that external conditions will continue to get better, then barring any other major public financial events at family businesses, we expect a sustainable recovery to take hold in the fourth quarter,” Jadwa Investment report said. Government spending is the key source of dynamism within the economy. Expenditure seems to be above budget and is likely to pick up further as implementation of those projects recently signed or retendered begins. In contrast, many private sector businesses face problems accessing finance. Given the caution within commercial banks only modest growth in lending is expected over the near-term. SAMA has made the environment conducive to lending once banks become less risk averse and interest rates are expected to stay very low. With oil prices likely to be in excess of the budgeted level, we expect only a very small budget deficit despite the anticipated overspending. The deficit on the current account will be larger, but is not a concern. The report pointed out that inflation has fallen sharply this year as the external factors behind its surge over the previous few years have all reversed. Food and commodity prices have dropped, bottlenecks have eased and exchange rate movements have been favorable. “There is sufficient slack in the economy to prevent domestically-driven inflation outside of the rental market for some time, but with commodity prices rising and the dollar slipping as global economic growth resumes, we do not expect inflation to fall much lower than its current level of 4.2 percent over the remainder of the year,” the Jadwa report said. It noted that the difficult economic environment has hit the financial performance of listed companies. Earnings per share for the first half of the year were 24.3 percent lower than for the same period of 2008. Earnings growth should be positive over the second half of the year owing to the improved economic situation and the very weak performance in the final quarter of last year, adding that stronger earnings should lift the TASI. After a period of moving in line with global markets broke down in mid-May, the market has traded sideways, missing out on the gains most other emerging and developed markets have recorded. We expect the market to break out of its current range and move higher in the final quarter and maintain our fair value projection for the TASI of 6,200 at the end of the year. Data for the year to date make clear that it has been a difficult period for the Saudi economy, the report said. Although there are some contradictions in the data, the themes that emerge are the weakness of consumers and private sector businesses, the essential role played by government spending and a lower contribution from the oil sector. While recent data suggests that the worst may be over, we do not yet see consistent signs of improvement and think that problems with some family business have pushed back the prospect of recovery into the fourth quarter. With oil, non-oil government and non-oil private as the three sectors that shape the Saudi economythe report said assessing the performance of the first two of these sectors is reasonably straightforward. Growth in the oil sector is largely determined by oil production. Oil production averaged just over 8 million barrels per day (b/d) in the first eight months of this year, compared to 9.3 million b/d in the same period of last year, a decline of 13.4 percent. Production has risen modestly in the last few months, but with Opec not expected to adjust output quotas this year, it is likely to remain well below the elevated levels of last year. The non-oil government sector has grown by around 3 percent per year for the last decade irrespective of what has been happening elsewhere in the economy and we see no reason for this to change in 2009. SAMA net foreign assets fell by $56 billion over the first seven months of the year. Deposits in foreign banks were down by $42 billion and investments in foreign securities were $15 billion lower. The government is drawing down its foreign reserves in part to finance spending, the report said. Over June and July SAMA net foreign assets fell by $13.3 billion, even though oil prices were well in excess of the level we estimate is required to balance the budget. Cement sales are up by 17 percent in the first six months of 2009 compared to a year earlier. “This points to a greater volume of work taking place on construction projects,” the report said. Growth picked up in recent months due to the conditional lifting of the export ban; in June cement sales were up by 21 percent in year-on-year terms. Imports via the Kingdom's ports over the first five months of 2009 were 18 percent lower than in the same period of last year. Imports of construction materials fell the most, by 29 percent; those of consumer goods were down by 12 percent. In month-on-month terms imports through the ports rose by 0.7 percent in May. Exports via the Kingdom's ports, excluding oil and gas, were down by 1 percent over the first five months of the year compared to the same period of last year, with only petrochemicals showing growth. Exports of all other goods were down by over 30 percent. The month-on-month data also shows a continued fall, with total exports through the Kingdom's ports down by 0.9 percent compared with April, and non-oil and gas exports down by 1.8 percent. Lower exports reflect the impact of the global recession on Saudi exporters. Bank lending to the private sector has declined in four of the first seven months of the year and in absolute terms is SR6 billion below its end-December level. Lending rose in June and July, but in year-on-year terms it is at a nine-year low. * Point of sale terminal data is the closest approximation to retail sales. Annual growth in the value of point of sale transactions was 6.9 percent over the first seven months of the year. The growth rate has declined in five of the seven months, but rebounded from -11.7 percent in June to -0.9 percent in July (seasonal spending trends distort the month-on-month comparisons). Note that there was an 11 percent increase in the number of point of sale terminals in the year to July. The value of commercial and personal checks cleared by local banks is down by 9 percent over the first seven months of 2009 compared with the same period of last year. The July total was the highest so far this year and the year-on-year decline was just 1.6 percent. Government contracts worth around $140 billion have been awarded so far this year, of which around $110 billion were for non-oil projects, Jadwa report further said. It added that the $75 billion of private sector projects cancelled or put on hold so far this year will have minimal impact as it is unlikely that many of these had got beyond initial plans. Though the economy “has slowed,” the report said the clear bright spot is the contribution of the government. “Government spending looks to have been well above target, which is providing a vital boost for some private sector contractors.” Moreover, the report said that although business activity “traditionally slows during the summer and Ramadan,” consumer spending picks up notably during the latter and “we think that the economy is in the midst of a period of consolidation during which confidence should improve.” Government has been aggressive in its policy response to the slowdown and the increasing visibility of new infrastructure and construction projects should help to boost sentiment, it pointed out. Provided external conditions continue to get better (the global recovery gains traction, oil prices hold above $60 per barrel and share prices make modest gains) then barring any other major public financial events at family businesses, “we expect a sustainable economic recovery to emerge in the fourth quarter.” Real GDP growth is forecast at -1.0 percent this year, with real private sector non-oil GDP slipping to a 10-year low of 2.3 percent, the Jadwa report noted. __
