JEDDAH: With the global economy no longer on the edge of the abyss, bullish trend is forecast for the latter part of 2010, led by the emerging economies particularly the BRIC group (Brazil, Russia, India and China). And Saudi Arabia, the least affected country in the entire Middle East when global economic slump struck in 2009, is now on the road to recovery. The National Commercial Bank (NCB), in its “Kingdom Economic Perspectives” report for October, said “the Kingdom is marching to recovery” based on the results of key macroeconomic indicators. The report forecast that the Saudi real GDP will grow by 4 percent in 2011 and by 3.7 percent in 2010 as the expansion in the oil sector is projected to complement the non-oil sector continued positive contribution to overall growth. The ninth five-year development plan (2010-2014) will usher in a new era of further support to the non-oil sector. The plan will witness the government allocating SAR1.44 trillion for myriad projects that span infrastructure and human development, which is 67 percent higher than the previous plan. Accordingly, growth in the real non-oil sector is expected to accelerate at a significant 4.4 percent in 2010 after posting 3.8 percent in 2009. The growing optimism during 2010 regarding the pace of global recovery and strong signs of demand rebounding in emerging markets had reduced the strict adherence to production cuts by OPEC members. According to our estimates, Saudi crude oil production is expected to have increased by an average of 200 thousand b/d, reaching an 8.3 million b/d, which will expand real oil GDP by 2.3 percent in 2010. Yet, the sector's contribution to overall economic growth will be a mere 0.64 percent. However, in nominal terms, with the weighted average Arab light prices rising from $59.2/bbl in 2009 to estimated $75/bbl in 2010, oil revenues are expected to increase by 38 percent, thus, allowing the government to continue the implementation of the development programs. In 2011, the contribution of the oil sector to real GDP growth would remain positive but modest as well, especially that our estimates do point that crude production will not cross the 8.5 million b/d threshold. The economic growth outlook for 2010 has improved immensely with the global economy settling down and growing again. The domestic economy is gaining traction through three main channels: (1) higher oil prices are expanding the dominant source of government revenues; (2) improvement in global demand for oil has motivated lower compliance to OPEC production cuts, and (3) stellar foreign capital inflows and resumption of private-sector credit continue to support the non-oil sector. Moreover, growth in the real non-oil sector is expected to accelerate at a significant 4.4 percent in 2010 after posting 3.8 percent in 2009, reflecting spillovers from government spending as well as a global economy ready to recover from the financial and economic crisis. Economic activities like education, healthcare, and utilities will continue to grow, supported by expansion plans to cater for an ever expanding population, with utilities, in particular, attaining an annual growth rate of 7 percent. The retail sector, growing at an annual average of around 5 percent in the last five years, is expected to expand above average at 6 percent due to stronger consumer confidence. Activity in the manufacturing sector is expected to be more buoyant this year, given improved demand prospects, growing at 4 percent in 2010. The construction sector will continue its rebound, rising by around 6 percent in 2010 after registering 4.7 percent in 2009. The strong escalation of 16.9 percent YTD in credit to the construction sector and the stellar growth of newly opened LCs for imports of building materials had been a major factor in supporting our forecast. Real non-oil GDP growth is expected to maintain this trajectory in 2011, provided that the global economy does not relapse into double dip recession and the government maintains an expansionary fiscal policy to achieve balanced development. In terms of investment, the report said foreign direct investment (FDI) is driving overall investment spending in the Kingdom higher, as the share of FDI in gross fixed capital formation (GFCF) has increased significantly, from an average of 1 percent in the period 1990-2000 to a remarkable 43.5 percent in 2009. The surge in FDI inflows is associated with: (1) the extensive number and diversity of projects currently underway, amounting to around $695 billion, (2) the substantial surge in investment expenditure by both the private and public sectors, that increased from about 17 percent of GDP in 2006 to nearly 25 percent of GDP in 2009, (3) the positive contribution from private consumption, attributed to population growth and rising GDP per capita, and (4) lower barriers to entry across various sectors, with new regulations speeding up company registration and easing restrictions on foreign investments. On equities, the NCB report noted that the uptrend is expected to continue through 2010, as emerging economies are projected to grow at a faster pace than their developed peers. Inflation levels will continue to remain range-bound in 2010 and seen at 5 percent level in 2011. The construction industry expects rapid expansion recovery as indicated by rising labor force, expected to reach 2.75 million workers by the end of 2010, a 5 percent rise on the previous year. Total expenditure in the Saudi construction sector, as measured by the level of gross fixed capital formation (GFCF), is expected to reach SR188 billion in 2010, a rise of 13.2 percent from the previous year. Although expenditure in residential construction will show faster growth as real estate developers attempt to subdue the Kingdom's housing shortage, non-residential works will still represent the bulk of investment at 72 percent. As construction industry picks up, the year 2010 will mark the recovery of credit growth, already evident by the 8.4 percent Q/Q rise in lending to the construction sector in the second quarter, with credit to the sector to grow by 7.5 percent to reach SR59.5 billion in the same year. The Kingdom's fiscal policy stance will continue to be expansionary. Given the uncertainty regarding the pace of global recovery, continued spending in 2011 is not only necessary but also feasible for the Saudi government. With a low domestic debt-to-GDP ratio and currently low interest rates, there is plenty of room to resume an expansionary fiscal policy. Moreover, the exceptionally strong external position coupled with the anticipated increase in oil prices means that the government can increase spending and compensate for any unexpected loss of foreign funding. Saudi Arabia's net foreign assets are currently at a healthy position, equivalent to approximately 56 months of imports, the highest import coverage on record. The report forecast that SAMA's net foreign assets will end on a higher note based on higher oil prices in 2010. “These assets will continue to provide an important safety cushion in the event of adverse oil price developments or external financing difficulties. Nevertheless, sustainable recovery will depend not only on the amount of spending, but also on its quality. That is why the budget will continue to emphasize both physical and human capital expenditure. In addition, the government will continue to allocate funds to specialized credit institutions to support private investment and consumption,” it noted. The report likewise noted that Sukuk financing had made a notable comeback. The global Sukuk market had recovered last year after being pummeled by the financial crisis in 2008, posting a 36 percent Y/Y increase after raising $19.1 billion, higher than $15.5 billion recorded in 2008. The Kingdom maintained its third-place ranking for the fourth year in a row, after Malaysia and UAE, as its four issuances collected a combined $3.1 billion in 2009, a 66 percent annual gain over 2008 figure. – Saudi Gazette At a time, when governmental institutions topped private sector entities in terms of issuances on a global scale in 2009, the Saudi corporate sector was the dominate player, with three issuances from Saudi Electricity Company (SEC), Saudi Hollandi Bank (SHB), and Dar Al-Arkan. The fourth was a quasi sovereign issue by the Islamic Development Bank. Interestingly, ailing confidence did not bring to a standstill the strong interest from investors, especially after the default on two GCC sukuk last year by one family business in the Kingdom and Investment Dar in Kuwait as well as the close call on a sukuk issued by Dubai World. Oversubscription was even the norm, with SHB's SAR725 million sukuk attracting more than SAR11.3 billion, a 14 times oversubscription that reduced the offered rate below the initial pricing target. In addition, SEC was able to price its SAR7 billion issuance at 95 bps above SAIBOR, which is far below a similar sukuk issued in mid 2009 at 160 bps above SAIBOR. We believe that sukuk issuance will rise again this year, for the following reasons. First, sukuk issuance offers an alternative source of long-term funding, especially at a time when bank lending is still constrained. Second, trading on the secondary market for Sukuk, albeit small, had risen significantly of late after a slow start since inception in June 2009, with the value of trades in 1H 2010 crossing SAR400 million mark compared to just SAR27 million in 2009. Third, there are seven announced issuances worth more than USD2 billion that are in the pipeline for this year, which would complement the three deals worth USD2.50 billion that have already been finalized by Dar Al-Arkan, Saudi Binladin, and SEC. We believe the continued issuance of Sukuks is positive from a macro perspective since the increase in the size of issued sukuk gradually boosts sukuk market liquidity and allows for timely market pricing of risk, a critical input in economic policy formulation.
