Saudi Arabias Economic Outlook

Presented to Saudi ArabiaJapan Business Council February 17, 2013 Fahad Alturki, PhD Senior Economist and head of research
1

Global economic outlook

Despite recent improvements in economic conditions and in market sentiment, the global economy
is still struggling to recover from the deep financial crisis.

The Eurozone economy is expected to be flat this year, but risks are to the downside. Recent measures on banking supervision, greater fiscal integration and accommodative
monetary policy are the positive factors, though progress is a concern.

The US economy is likely to see a stronger recovery following the partial fiscal cliff agreement and
the on going improvements in the labor market.

Further fiscal contraction, debt ceiling and long term fiscal sustainability are the main concerns. There is a persistent divergence between weak performance in advanced economies and firm
performance in emerging economies.

2007
World US Japan EuroZone UK China Emerging Markets Middle East
2

2008
2.8 -0.3 -1.0 0.4 -1.0 9.6 6.1 4.5

2009
-0.6 -3.1 -5.5 -4.4 -4.0 9.2 2.7 2.6

2010
5.1 2.4 4.5 2.0 1.8 10.4 7.4 5.0

2011
3.9 1.8 -0.6 1.4 0.9 9.3 6.3 3.5

2012 E
3.2 2.3 2.0 -0.4 -0.2 7.8 5.2 5.2

2013 F
3.5 2.0 1.2 -0.2 1.0 8.2 5.5 3.4

2014 F
4.1 3.0 0.7 1.0 1.9 8.5 5.9 3.9

5.4 1.9 2.2 3.0 3.6 14.2 8.7 5.7

Source: IMF and Jadw a Investment

Two-speed global economy

Emerging markets are growing at a faster rate and have more policy space
9.0 8.0 7.0 Advanced Economies Emerging Markets Real GDP (2013, % y/y) 8 7 6 Current central bank rates

Advanced Economies

Emerging Markets

6.0
5.0 4.0 3.0 2.0

5
4 3 2 1 0

1.0
0.0

Euro area Sweden Japan UK Switzerland US Canada Norway Australia Poland S. Africa Brazil Korea Russia Mexico Turkey Chile Indonesia India China

Advanced economies are facing more difficult initial conditions

Government balance (% of GDP)
0.0 -1.0 -2.0 -3.0
3.0 2.5 Current account balance (% of GDP) Emergning Markets Advanced Economies

2.0
1.5 1.0

-4.0
-5.0

-6.0
-7.0 Advanced Economies Emergning Markets

0.5
0.0 -0.5 -1.0

-8.0
-9.0 2009
3

2010

2011

2012 F

2013 F

2014 F

Japan US Switzerland UK ECB Sweden Canada Norway New Zealand Australia Korea Poland Mexico S. Africa Chile Russia Turkey Indonesia China Brazil India
2009 2010 2011 2012 F 2013 F 2014 F

Saudi economic outlook: sailing though

The Saudi economic growth is among the highest compared to G20 countries. Positive growth outlook for 2013-14 is supported by (i) high government spending, (ii) robust
domestic consumption and (iii) supportive credit to private sector.

High oil revenues levels will boost business and investor confidence, but major risk to this
scenario is a global growth meltdown that bring a sustainable decline in oil prices.

Real GDP Growth will slow in 2013

10
12 10 8
(percent)

as real oil GDP contracts

Real GDP

8 6
(percent)

Real oil GDP

Real non-oil GDP

4 2 0 -2 -4
1998 2000 2002 2004 2006 2008 2010 2012 E 2014 F Saudi Arabia Advanced economies World Emerging markets

6 4 2 0 -2 -4 -6

-8
2004 2006 2008 2010 2012 E 2014 F

Oil market: still favorable, but risk remains

Crude oil markets have begun 2013 with a gentle drift to the upside. Geopolitical developments particularly in the Middle East will be a major driver for the oil market
in 2013, while subdued global economic recovery will pull prices down.

Despite gloomy economic picture in advanced economies, global demand for oil will remain
positive supported by non-OECD countries.

Oil price and geopolitical risk premium

130
120 110 100
($ per barrel)

Change in global oil demand

(year-on-year change)
1,800

4 3

Arab uprising

1,600

1,400

(million barrels per day)

2 1 0 -1 -2 -3
Non-OECD OECD Global

90 80 70 60 50 40 30 2009 600 2010 Brent 2011 2012 2013 MSCI World Equity Index, RHS 1,200

US/EU sanctions on Iran

1,000

800

-4
Q405 Q406 Q407 Q408 Q409 Q410 Q411 Q412 Q413

Oil market: still favorable, but risk remains

US oil output has grown by 2.48mbpd over the past four years, which has been absorbed into
global balances and still left room for OPEC to increase.

Saudi Arabia have started cutting crude production since mid-2012 in response to rising N.
America and Iraq production.

We expect Saudi oil export price to maintain USD100-105/b range at a production level of 9.6 in
2013.

Change in N. America oil supply

(year-on-year change)
1.3
1.1
(million barrels per day)

Change in Saudi oil supply

(year-on-year change)
2.0 1.5

0.7 0.5 0.3 0.1 -0.1 -0.3 -0.5

9
(percent )

(million barrels per day)

0.9

Mexico Canada U.S. N. America, RHS

15
13

11

7 5 3 1 -1 -3 -5

1.0 0.5 0.0 -0.5 -1.0

In the short-term: oil windfalls will maintain strong CA position

Positive global demand for hydrocarbon products and elevated oil prices will maintain a double
digit currant account surplus this year.

Solid domestic performance is expected to keep imports and the invisible account deficit
elevated.

CA surplus in turn allows for a significant buildup of foreign exchange reserves.

Current account balance
200 180 160 25
(USD billion)

FX reserves accumulation
30

USD billion

Percent of GDP, RHS

700 600 500

Investment in foreign securities Deposits abroad and foreign currency Gold, SDR and position in the IMF

140
120 100 80 60

20

400
300 200

15

10

40
20 0 2003 2005 2007 2009 2011 2013 f

100 0 Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

leading to a strong sovereign balance sheet

Oil revenues will also keep the fiscal balance strong despite increasing spending: Support to domestic demand and positive spillover to non-oil private sector. Housing, construction, transport, retail and financial sectors to benefit the most.

Budget spending priorities are consistent with recent years.

Government budget
1,400 1,200 1,000
(SR billino)

Spending by sector
600
(SR billion)

500 400 300 200 100

(SR billion)

800 600 400

225 200 175 150 125 100 75 50 25 0

Municipal Services

2009

2010

2011

2012

2013 f

Transport & comms.

Water, ag & infrastructure

200 0
2003 2005 2007 2009 2011 2013 F

0 -100 Revenue Expenditure Budget balance, RHS

Health & social affairs

Education & manpower

but some LT risks remain

Despite rising spending, high savings and low debt mean spending is affordable, for the moment. The long term challenges: Fiscal rigidity risk: current spending are rising by an average of 10 percent per year for 200212. Source of income risk: breakeven oil prices have risen from $24pb in 2012 to $67pb in 2012.

Government debt
800 700
(SR billion)

Current spending and fiscal breakeven oil prices

700

Public debt

% of GDP, RHS

120
600

Current spending Fiscal breakeven oil price, RHS

100 90 80

100
(percent of GDP)
500
(SR billion)

600 500 80

70
($ per barrel)

400
300 200 100 0 2002 2004 2006 2008 2010 2012 E

60
50 40

400 300
200 100 0 1998 2001 2004 2007 2010 2013 f

60
40

30
20 10 0

20
0

What is a fair oil price?

We are working...to steady the market at a fair price of $25 per barrel. Saudi Oil Minister, Ali Naimi, June 27, 2001 Everyone is looking at this price [$75 to $80 per barrel] and everyone is saying this is great. That is why I said it is almost a perfect price. Saudi Oil Minister, Ali Naimi, January 25, 2009

We want a price around $100 per barrel. A $100 per barrel price is great. Saudi Oil Minister, Ali Naimi, May 13, 2012

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In the ST, a record high investment spending paves the way

High capital spending remains psychologically important for the private sector. A record high investment spending in 2013 will maintain a solid and sustainable growth in
manufacturing, construction and transport sectors.

A capacity constraint is likely to limit the expansions of capital spending in 2013-14 compared to
the previous two years.

Government investment spending

300
14 12

Sectoral GDP growth

250
200
(SR billion)

Annual average growth of 25 percent for 2003-13

10 8 6 4 2 0

150 100 50 0 2002 2004 2006 2008 2010 2012 E

2007
Manufacturing

2008

2009

2010

2011

2012 E

2013 F
Retail

Construction

Transport, Storage & Communication

11

Real GDP growth by sector

Three categories of sectors:

Construction and transport, the main beneficiaries of government investment spending,

should be the fastest growing sectors in 2012.

Consumption oriented sectors expected to do well on favorable domestic demand, rising

government consumption spending and recent labor market reform.

Export oriented sectors could be under pressure on the back of worsening global demand.
Real GDP growth by sector, % Agriculture Manufacturing Electricity, gas and water Construction Wholesale & retail trade Transport & communication Finance Non-oil private sector Oil Government services Total 2008 0.7 6.0 6.7 1.5 6.5 12.2 2.4 4.6 4.2 3.7 4.2 2009 -0.5 1.5 6.8 0.6 2.5 7.4 2.6 2.7 -7.8 5.2 0.1 2010 -1.0 6.6 7.9 7.3 7.7 6.4 2.1 5.6 0.9 6.5 4.8 2011 2.2 13.7 5.2 9.9 7.3 13.8 2.1 7.8 10.4 8.7 8.5 2012 E 2.6 7.6 7.3 10.3 8.3 10.7 4.4 7.5 5.5 6.2 6.8 2013 F 0.5 5.5 5.7 7.5 4.5 6.2 3.3 6.3 -1.5 4.3 4.2

12

Construction sector indicators

Local demand for manufactured products, especially those used for construction, such as cement
is likely to maintain an upward trend.

According to Middle East Economic Digest, there are projects underway or planned in the
Kingdom worth $783 billion; virtually all of these involve some element of construction.

New letter of credit opened for imports of building material followed the capital spending
upward trend.

Cement production and sales

5.5 5.0 4.5 4.0
(mn tons)

New letter of credits opened for construction material

25 Letters of credit opened for imports of building materials Capital spending, RHS 300 250

Sales

Production

20
(SR billion)

15 150 10 100 5 50 0 1999 2001 2003 2005 2007 2009 2011

3.0 2.5 2.0 1.5 1.0 0.5 0.0 2008

0 2009 2010 2011 2012 2013

13

(SR billion)

3.5

200

The banking sector is on solid footing

Domestic banks have comfortable liquidity position most of which driven by consecutive years of
expansionary government budgets.

This should help banks offset any material sudden liquidity pressures due to regional and global
uncertainties.

The incremental increase in deposits reached a record high last year most of which were
deposited at the central bank.

Change in commercial bank deposits

180 150

Commercial bank deposits with SAMA

200 Excess Reserves 180 Statutory Reserves 160 140 120 100 80 60 40 20 0 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12

Demand deposits
Time & savings deposits Other deposits

120
90 60 30
(SR billion)

(SR billion)

0
-30 -60 1994 1997 2000 2003 2006 2009 2012

14

Bank lending to private sector will be supportive

Saudi banks continue to play a key role in supporting non-oil growth.
Relatively high risk aversion is easing, supported by government expenditures despite global
uncertainty.

As a result, bank profits have improved, reaching pre-crisis level in absolute value.

Lending to private sector

160 140 120
(SR billion)

Bank profits
40 35 30 25 20
(year-on-year change in percent)

40 35 30

(SR billion)

100 80 60 40 20 0 1997 2000 2003 2006 2009 2012 Net new claims on private sector

25
20 15 10 5 0 1997 2000 2003 2006 2009 2012

15
10 5 0 Claims on private sector, RHS

15

Domestic demand is rising

Monthly data points to an upward trend in consumer spending, despite seasonal trend. Retail, telecom, and financial sectors will benefit from the recent government initiatives
particularly the ongoing labor market reform.

Consumer demand for real estate has pushed personal lending to a new high.
Consumer spending
12 11 10 9 8 7 6 5 4 3 Dec-08 60
32 28

Consumer lending
Other Consumer Loans, ppt Cars & Equipment, ppt Real Estate Finance, ppt Consumer Loans, % y/y

55
(SR billion)

(SR billion)

50 45 40

24
20 16 12 8 4 0

35
30 Dec-09 Dec-10 Dec-11 Point of sale transactions Cash withdrawals from ATMs, RHS 25 Dec-12

-4
Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Dec11 Jun12

16

Inflation cooled but not entirely

Inflation slowed to 4.5 percent in 2012 with the core rate falling at a faster rate. Some local inflationary pressure is likely to remain as a result of the high level of consumer and
government spending, rising bank lending and low interest rates.

Domestic rental inflation, international food prices and weaker dollar will be the main divers of
inflation in 2013.

Inflation, per components

9 8 7 6 5 4 3 2

International food prices

70 60 50
(Percent)

Other goods & services contribution (ppt) Rent and utilities contribution in (ppt) Food, drink and tobacco contribution (ppt) General Index, % y/y Core Index (excl. food and housing/rent, % y/y)

FAO food price index

FAO meat price index FAO cereals price index

40 30 20 10

0
1 0 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

-10
-20 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

17

Conclusion
2012 was a difficult year for the global economy. US debt ceiling, fiscal sustainability in the US
and the Euro crisis will be the focus of this year.

High government spending will be the main source of economic growth in the Kingdom. This
spending is affordable, at the moment. Other economic growth divers include:

Solid domestic demand Higher bank lending and low interest rates. Oil prices will remain elevated, though both prices and production will slightly fall over the
remainder of the year.

Strong Saudi story and uncertain global environment means Kingdom should be attractive to
foreign investors.

Short-term risks are external; the global economy and the regional political situation. Structural
problems with the labor force, rapidly growing energy consumption and role of government are long-term term concerns.

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Saudi Arabia: Key data and forecasts

2006 Nominal GDP (SR billion) ($ billion) (% change) Real GDP (% change) Oil Non-oil private sector Non-oil government Total Oil indicators (average) Brent ($/b) Saudi ($/b) Production (million b/d) Budgetary indicators (SR billion) Government revenue Government expenditure Budget balance (% GDP) Domestic debt (% GDP) Monetary indicators (average) Inflation (% change) SAMA base lending rate (%, end year) 2.3 5.20 4.1 5.50 9.9 2.50 5.1 2.00 5.4 2.00 5.0 2.00 4.5 2.00 4.3 2.00 3.8 2.00 65.4 59.2 9.2 72.7 67.2 8.8 97.6 94.0 9.2 61.9 60.4 8.2 79.6 77.5 8.2 111.1 103.8 9.3 112.0 106.1 9.8 104.0 99.4 9.6 100.2 96.2 9.4 1,552 413.9 12.9 1,676 447.0 8.0 2,075 553.3 23.8 1,641 437.7 -20.9 1,976 526.8 20.4 2,511 669.5 27.1 2,727 727.3 8.6 2,819 751.6 3.3 2,905 774.5 3.0 2007 2008 2009 2010 2011 2012 E 2013 F 2014 F

-0.8 6.1 3.1 3.2

-3.6 5.5 3.0 2.0

4.2 4.6 3.7 4.2

-7.8 2.7 5.2 0.1

0.9 5.6 6.5 4.8

10.4 7.8 8.7 8.5

5.5 7.5 6.2 6.8

-1.5 6.3 4.3 4.2

-1.4 5.0 4.0 3.6

674 393 280 18.1 365 23.5

643 466 177 10.5 267 15.9

1,101 520 581 28.0 235 11.3

510 596 -87 -5.3 225 13.7

742 654 88 4.4 168 8.5

1,118 827 291 11.6 136 5.4

1,239 853 386 14.2 99 3.6

1,047 870 178 6.3 90 3.2

990 859 131 4.5 85 2.9

External trade indicators ($ billion) Oil export revenues Total export revenues Imports Trade balance Current account balance (% GDP) Official foreign assets Social and demographic indicators Population (million) Unemployment (15+, %) GDP per capita ($)

188.2 210.9 63.0 147.8 98.9 23.9 273.4

205.3 233.1 81.5 151.6 93.3 20.9 359.8

281.0 313.4 100.6 212.7 132.3 23.9 502.0

163.1 192.2 86.4 105.8 21.0 4.8 474.2

215.2 251.0 96.7 154.3 66.8 12.7 520.3

317.6 364.6 119.1 245.5 158.5 23.7 621.5

347.2 396.0 128.0 268.0 178.5 24.5 648.7

279.4 332.9 143.3 189.6 95.4 12.7 695.8

263.4 319.6 156.8 162.8 66.1 8.5 728.5

24.1 12.0 17,157

24.9 11.0 17,921

25.8 9.8 21,458

26.7 10.5 16,417

27.6 10.2 19,113

28.4 12.4 23,594

29.3 12.1 24,859

30.2 10.0 24,926

31.1 9.5 24,916

19