Positive Investor Sentiment Expected in the Kingdom in the Last Quarter of 2016

by shariff mohammed | Nov 08, 2016

Economic data for September showed a downward trend in Saudi Arabia economic activity, according to Jadwa Investment.Growth in cash withdrawals from ATMs and point- of-sale transactions was negative in both year-on-year and monthly terms, Jadwa researchers stated in the November chart book released recently.

The non-oil PMI slowed, but continued to point to an expansion in activity. Cement sales and production posted 23.1 percent and 18.4 percent year-on-year declines, reflecting a slowdown in construction activity, the report added. Higher oil prices and Saudi Arabia’s record international bond sale and higher oil prices led to Tadawul All-Share Index (TASI) rising by 10 percent last month.

Recent announcements regarding resuming payments to contractors and the approval of non-resident foreign investors to trade in exchange-listed real estate funds could see positive investor sentiment being carried forward into the months ahead, according to Jadwa economists.  Commenting on government finance, the Jadwa economists said that the net monthly change in government accounts with the Saudi Arabian Monetary Agency (SAMA) remained negative for the fourth consecutive month, falling by SR15 billion in September.

Recent data on outstanding public debt points to an increasing tendency by the government to rely on debt issuance rather than reserve withdrawals to finance its spending, the report stated. It said that a transfer of around SR30 billion to current deposits seems to point to a potential resumption of payments in coming months, as announced recently by the government.

“We estimate the total amount of outstanding public debt to have reached SR359 billion by the end of October, of which 71.3 percent is domestic,” the economists said.  Although SAMA’s foreign exchange reserves fell by $7.4 billion in September, the general trend points to a slowdown in monthly foreign reserve withdrawals. This in part, reflects the impact of the increasing reliance on debt to finance government spending, as well as improving oil export revenue, according to the chart book.

It said the monthly bank credit to the private sector fell slightly in September. Third-quarter data points to a slight slowdown in year-on-year credit growth to both consumers and corporations. Within the corporate sector, credit by kind of economic activity showed that so far in 2016, the commercial sector was the largest recipient of new bank credit (45.3 percent of total new credit), the report stated.

Agriculture and mining were the other sectors that received more credit so far in 2016 compared to the same period in 2015.
According to the report, total bank deposits rose by SR4 billion in September. This rise was attributed to a net increase in private sector and other deposits, while government deposits fell slightly. Measures to manage liquidity have contributed to halting the constant rise in the cost of funding.  

“Moving forward, we expect an increase in government deposits to result in a further easing of liquidity conditions,” said the Jadwa economists. The report said that Saudi inflation slowed to 3 percent in September, a new 2016 low. Food inflation came out negative for the second consecutive month, but showed a rise in month-on-month terms. With the exception of home furnishing, health, and communication, all other components of the core index posted a slowdown, according to the chart book.
“We believe that easing liquidity conditions will prevent inflation from slowing further during the remainder of 2016,” the economists said.

August data on non-oil exports and imports showed a recovery from four and five-year lows, respectively, according to the report. However despite August’s recovery, both remained consistently lower than previous years. Non-oil exports remained 13.5 percent lower, year-on-year, mainly owing to subdued global demand. Meanwhile, imports rebounded but are well below their 2015 levels. New letters of credit opened point to a continued recovery in imports in coming months, the report added. It said that Saudi crude oil production was flat month-on-month in September at 10.6 million barrels per day.

“We do expect a drop in oil production in the next few months, as is typically the case after peak summer output, but not by significant amounts. Latest available data shows Saudi crude oil exports declining month-on-month in August,” the economists commented.

Brent prices were up 5 percent and WTI up a sizeable 11 percent, month-on-month in October, as OPEC said it was willing to cut production. Brent oil prices hit highs of $51 per barrel at one point in October, but dipped toward the end of the month.

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