Saudi EconomicOutlook & Banking Beyond the Crisis

King Fahd University Of Petroleum & Minerals

December 2010

Said A. Al-Shaikh

National Commercial Bank

Outline

• Global Economic Update• Saudi Arabia Economic Outlook

• Budgetary Developments & Fiscal Policy• Economic Growth Forecasts & Megaprojects• Inflation & Monetary Policy• Banking & Financial Markets

Global Economic Update

Sources: IMF

Global recovery evolved on a steady path in 2010; yet, economic growth will be uneven, with modest growth in developed economies (2.7%), and strong growth in emerging economies (7.1%)

2.6

1.7 1.7

2.8

3.3

2.3

2.0

1.5 1.5

2.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

USA UK Euro zone Japan Germany

Percentage Real GDP Growth

2010 2011

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

48

50

52

54

56

58

60Global composite manufacturing & services PMI

Sources: IMF and JP Morgan

As the effect of stimulus measures wane, demonstrated by weakening PMI since April, global economy is losing momentum with growth expected to slow to 4.2% in 2011 after rising 4.8% in 2010, but a double dip is unlikely

Dollar has been weakening since 3Q, against Euro, on weak economic data in US and expectations of further QE, though medium term weak outlook in Euro area may rebalance Euro-Dollar

Sources: Reuters

FX Movements(January 2006=100)(Percent)

-30

-20

-10

0

10

20

30

40

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Trade weighted dollarindexEUR/USD

Saudi Arabia Economic Outlook

Budgetary Developments &Fiscal Policy

Sources: EIA, OPEC and NCB

Crude oil prices, based on a gradual recovery in global demand, are expected to average $80 with Saudi production rising to 8.5 million b/d in 2011.

0

20

40

60

80

100

120

140

160

0

2

4

6

8

10

12

Jun-

06

Nov

-06

Apr

-07

Sep-

07

Feb-

08

Jul-08

Dec

-08

May

-09

Oct

-09

Mar

-10

Aug

-10

Average Monthly Crude Production, MMBD (LHS)

Period Average Crude Price, USD/bbl (RHS)

Arabian Light Spot Price, USD/bbl (RHS)

Sources: SMA, MOF and NCB Research

The Current and Fiscal account Balances are projected to register higher surpluses in 2010 and 2011, on expected higher oil revenues

Twin Balances

6.0

10.8 10.0

(3.2)

5.2 4.7

-5

0

5

10

15

20

25

30

35

2003 2004 2005 2006 2007 2008 2009 2010f 2011f

(percent)

Current Account/GDP Budget Balance/GDP

Sources: MOF and NCB Research

Official Budget vs. Actual Spending            

(in SAR billion, unless otherwise stated)            

  2008 2009 2010

  Budgeted Actual Budgeted Actual Budgeted NCB Est.

Revenue 450.0 1,101.0 410.0 505.0 470.0 690.0

Oil 370.0 983.4 320.0 449.5 385.0 619.3

Non-oil 80.0 117.6 90.0 55.6 85.0 70.8

Expenditure 410.0 520.1 475.0 550.0 540.0 605.0

Current 245.0 388.9 250.0 410.4 280.0 441.7

Capital 165.0 131.2 225.0 139.6 260.0 163.4

Balance 40.0 580.9 -65.0 -45.0 -70.0 85.0

Memo: (USD/bbl)

Implicit budget oil price 46

Forecast oil price 75

Despite rising expenditure beyond budget, the fiscal balance in 2010 is expected to record a surplus on higher oil revenues

The government has been placing greater emphasis on capital expenditure in order to create job opportunities and support economic growth in the medium-term

Sources: SAMA, MOF and NCB Research

Sources: MOF and NCB Research

The public debt has been reduced sharply, and now government expected to pay off the outstanding debt, but gradually and over an extended period of time

Net Foreign assets, largely in US fixed income securities, will regain back its position of 2008, enabling the government to pursue its fiscal expansionary policy beyond 2010

Sources: SAMA and NCB Research

Economic Growth Forecats &

Megaprojects

Sources: SAMA, MOF and NCB Research

Saudi Economy is well placed to grow at pre-crisis levels, underpinned by government spending, with non-oil private sector leading the recovery

0.60%

3.7% 4.00%

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010f 2011f

(percent)

Real GDP Growth, Contribution by Sector

Oil Non-oil Private Non-oil Public Real GDP Growth

Sources: SAMA and NCB Research

Macroeconomic Indicators        

(% change unless otherwise indicated)        

  2009 2010f 2011f

   

Nominal GDP (SAR billion) 1,409.0 1,626.0 1815.0

Real GDP 0.6 3.7 4.0

Oil Sector -6.7 2.3 2.6

Non-oil Sector 3.8 4.4 4.5

Of which:

Manufacturing 2.9 4.0 5.5

Construction 4.7 6.0 6.5

Utilities 6.8 7.0 6.0

Private Services 4.1 5.5 5.4

Government Services 3.8 3.0 2.5

CPI inflation (average) 5.1 5.2 5.0

Current account balance (% of GDP) 6.0 10.8 10.0

Overall fiscal balance (% of GDP) -3.2 5.2 4.7

Arab light oil price (USD/bbl) 59.2 75.0 80.0

The robust government infrastructure spending will continue to lend support to the non-oil sector, mainly utilities and construction

Although expenditures in residential construction show faster growth, non-residential works still represent the bulk of investments at 72% with GFCF rising to SAR188 bn in 2010

0

40,000

80,000

120,000

160,000

200,000

2002 2003 2004 2005 2006 2007 2008 2009 2010

SR Million

Non-ResidentialResidential

Sources: SAMA

2009 Stock0

15,000

30,000

45,000

60,000

75,000

90,000

105,000

120,000

135,000

150,000

30,951

34,194

15,378

57,189

9,557

USD Mn147,144

Improved business environment along with economic reforms have accelerated FDI inflows, with manufacturing accounting for the largest share followed by finance & real estate

Sources: SAGIA

2007 2008 20090

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2,724 2,866 2,758

9,65912,014 11,683

1,552

3,634 4,4444,257

11,1358,398

4,628

8,502

8,233

Mining, Extraction of Oil & Gas Services

Manufacturing

Contracting

Finance & Real Es-tate

Others

USD Mn

22,820

35,516

38,151

Steps taken by PIF and SIDF to provide funding for mega infrastructure and industrial projects along with ECA’s and improving appetite of local banks are easing the financing challenge

$335,204

$71,758

$80,688

$88,974

$32,035$32,450

$54,326

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

Projects by Sector (Current)

Others

Refining

Oil & Gas

Infrastructure

Power

Petrochem

Construction

728 current projects in the Kingdom exceeded SAR2.6 tr in worth, while 22% of projects are in the execution phase led by construction, infrastructure and power, respectively

0 50 100 150 200 250 300 350

Construction

Infrastructure

Oil & Gas

Petrochem

Power

Refining

Others

USD billion

Design

EPC (Bid)

EPC (PQ)

Execution

Exploration

Outline-Design (FEED)

On Hold

Planned

Retender

Study

Sources: MEED Projects, as of June 2010

Contracts awarded in 2010 and 2011 are forecasted at SAR240 bn and SAR323 bn, respectively, while construction sector dominates the market, followed by petrochemical and oil & gas sectors

Sources: MEED Projects, as of June 2010

0

10

20

30

40

50

2010 2011 2012 2013 2014 2015

USD Billion

Construction

Oil &Gas

Power

Petrochemicals

Water & Waste Water

Infrastructure

To be continued