Saudi Arabia remains a fertile ground for investment with a very promising economy as a result of “strong oil price, continued public sector investment in infrastructure and diversification, boosting growth in the non-oil private sector, continued high population growth and a young population, a well-capitalized banking system, and a sound monetary policy framework,” Deutsche Bank said in its special report on the Kingdom issued Tuesday. The bank also forecast oil price to peak $175 a barrel in 2016. Oil prices bounced above $80 per barrel once again on Wednesday, a level that even OPEC leaders have said is too high given the fragile state of the global economy. Benchmark crude for December delivery added 80 cents to settle at $80.40 a barrel Wednesday on the New York Mercantile Exchange. In London, Brent crude for December delivery added 78 cents to settle at $78.89 on the ICE Futures exchange. The Kingdom's outlook remains broadly positive. A team of Deutsche Bank analysts said in the report that “the current modest market valuation is the reflection of a post-oil price collapse trauma and a consequence of the Algosaibi/Saad debacle, and does not yet reflect the country's long-term growth prospects.” “In 2010, we expect the Saudi economy to grow by 3.8 percent, well ahead of all the other countries in EMEA except Turkey and Qatar,” the bank said. With the current account and fiscal balances expected to remain in surplus (the current account comprised 5.7 percent of GDP in 2009E), “we expect (the Kingdom) to continue to build up its foreign asset stock with domestic debt levels inching down further,” noting that Saudi Arabia has no external sovereign debt. But the bank said private sector growth should be boosted by the government's continued diversification efforts and structural reforms. Saudi Arabia has reduced its debt level from over 100 percent of GDP at the end of the nineties to around 13.5 percent, the report said. Moreover, growth potential of the Saudi consumer sector is underpinned by solid economic fundamentals, an under-leveraged consumer, attractive demographics, and a fragmented and unsaturated modern retail market, the report noted. “The consumer population is young, urbanized (around 60 percent in the five largest cities), fast-growing and shopping-focused due to the key role shopping plays as one of the main forms of entertainment in the Kingdom.” Retail spending (adjusted for GDP per capita) is lower than that in other fast-growing markets such as Brazil, India and Turkey, and retail real estate supply remains well below other major GCC economies. Additionally, small traditional retailers continue to have a dominant presence, which creates an opportunity for consolidation. Besides, the Kingdom's property market is the biggest across the GCC. According to the Ministry of Economy and Planning, the Kingdom requires 1 million residential units in the next 5 years, while on the supply side the industry is characterized by the dominance of small developers capable of delivering at most 5,000 units a year. Even the non-residential stock is old and falls short of demand, the report said. “We expect non-oil GDP growth - the appropriate measure of job-creating economic activity in oil exporting countries - to grow by 2.0 percent in 2009 and 4.2 percent in 2010 supported by an expansionary fiscal stance as the government continues with key investment projects and diversification efforts.” The country's fiscal and external accounts are projected to remain in surplus going forward, the report said, albeit at a much lower level than recent years, owing to a fall in oil revenues and an expansionary fiscal stance. In addition, the credit trend suggests that domestic demand should benefit from an easing back in the pace of deleveraging, while the combination of positive growth in oil prices and increased production in 2010 should mean that real growth is likely to return to 2007/08 levels by next year. Additionally, the Saudi equity market trades on a modest 11.3x 2010 earnings (MENA average 9.7x, EMEA average 10.2x, EM average 12.4x, Saudi historical average 17.2x) despite expected 12 percent growth in 2010 and healthy growth prospects after that. The index was up 30 percent in the year to Oct. 31, but was down 46 percent from the high reached in January 2008 (11,697) and 70 percent down from the market historical peak of February 2006 (20,635). Performance in the year to Oct. 31 was modest compared with other countries such as Brazil (118 percent) and Russia (113 percent). The report pointed out that the Saudi market is also one of the markets furthest off its peak, together with China and the other MENA markets. The Saudi market historically has shown a relatively low correlation with the MSCI World. The market did not follow the internet bubble at the end of nineties and did not match the subsequent correction. However, the Saudi market had its own bubble at the end of 2005 and crashed in 2006. The more recent past has been more in tune with the rest of the world, with the market losing over 60 percent of its value between its 2008 peak and its trough earlier this year, the report noted. The Saudi telecom industry has grown at CAGR of 13.5 percent to reach $13 billion revenues by end
