Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Middle EastMarch 7 2005

Performance rises higher

Another bumper year for the Saudi economy in 2004 included dynamic growth in non-oil private sectors, such as telecoms. And banks are beginning to benefit from growing capital markets activity, as Stephen Timewell reports from Riyadh.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

After an exceptional year in 2003, Saudi Arabia excelled itself in 2004, producing another record-breaking performance across most sectors and laying the foundations for continued robust growth in the years ahead. While oil still underpins the economy and high oil prices produced record oil export revenues of $106bn in 2004 – well above the average of $69bn for the previous five years – the real dynamism has come from the non-oil private sector.

Investor confidence

Despite the domestic bombings and political uncertainties elsewhere in the region, particularly Iraq, confidence is high among local investors buoyed by the implementation of the capital markets law in July 2004 and a string of fiscal and structural reforms. The non-oil private sector grew by 5.7% in 2004, its highest growth since 1982, and the best performance was in telecoms, non-oil manufacturing and construction.

Reflecting the boom, the stock market index shot up 84.9% in the course of the year and in the last quarter, Saudi investors got a taste for initial public offerings (IPOs) with the massively successful flotations of Etihad Etisalat of the United Arab Emirates and the National Company for Cooperative Insurance (NCCI). Etihad, for example, attracted more than four million Saudi subscribers.

Home attractions

Saudis are discovering the opportunities inside their own borders and, with the creation of the Capital Market Authority (CMA), they are gaining the tools to access them effectively. After years of seeking investments abroad, Saudis are now finding their home market attractive. As the vice-governor of the Saudi Arabian Monetary Agency (Sama), Muhammad Al-Jasser, says: “Investors are finding out that the safe haven is here.”

The growth in the non-oil sector is one of the most exciting developments in the kingdom. It is the culmination of a variety of plans and strategies that have now come together and are not related to the spike in oil prices in 2004.

The CMA has been a long time in the making. The capital markets law was approved in June 2003, but new chairman Jammaz Al-Suhaimi has been intent on creating a capital market with high international standards. The success and high standard of the Etihad and NCCI offerings has attracted interest, helped to drive the stock market and got the CMA off to a good start.

And there is a lot more activity in the pipeline. The flotation of the new Al Bilad Bank, a group of moneychangers that joined forces to form a 50/50 private/public joint venture, is expected to attract a lot of interest. This IPO, managed by the renamed Samba Financial Group, is expected to close on March 9 and to be followed to the market by an IPO for AlMarai Company, a dairy and juice provider. Analysts expect at least 12 companies to come to market in 2005 and this could include the country’s largest bank, National Commercial Bank, another long-awaited investment opportunity.

The banks, through their brokerage arms, are clearly enjoying the growth in the stock market, up 85% and 76% in the past two years respectively, and the IPOs offer another attractive new role for those wanting to participate. In this arena, large international banks are being allowed to enter under the new laws and, in the coming months, giants such as HSBC, JPMorgan, BNP Paribas and Deutsche Bank are expected to make their presence felt in the expanding investment banking sector.

With a multitude of family-owned businesses wanting to cash in and the government keen to pursue its privatisation plans, this area of IPOs and advisory has huge potential, not only for the banks but in building a vibrant capital market.

Banks build business

Banks are also building profits in relatively new business areas such as consumer finance, which previously lacked good collateral. The advent of the salary assignment system, whereby borrowers assign a portion of their salaries to banks, has given banks reassurance and an enormous new market. Not all banks have matched the 74% and 52% growth in net profits achieved by Samba Financial Group and Arab National Bank respectively, but all participated in the significant growth in bank lending in 2004, a substantial slice going to consumer finance. Sama figures show that total bank credit rose 36.6% in the first 11 months of 2004, while total deposits rose 20.6%.

Banks were 2004’s big winners and Fahd Al-Mufaarrij explains that the aggregate net profits of Saudi’s 10 commercial banks reached SR17bn ($4.5bn), an increase of almost 40% on the SR12.2bn achieved in 2003. Again, the banks’ success cannot be attributed directly to oil – much has been due to changing market conditions on the domestic front and new opportunities. However, a positive oil price environment has done no harm.

With regard to major projects, in 2004 a number of planned investments in water, power and petrochemicals finally came to market. More are due in the next few years. For a number of years, there was a hiatus in megaprojects in the kingdom due to negotiations on the mammoth gas initiative and it was not until mid-2003 that the passage of some major projects was unblocked.

Structural change

Again, these developments show the structural changes that have taken place in recent years, both across the economy and in the financial sector and they reflect the importance of the non-oil factors in Saudi Arabia’s growth story. These diverse growth drivers lead Samba’s chief economist, Brad Bourland, to conclude that “the economy is the strongest and most balanced it has been in many years”.

According to the government, in total Saudi gross domestic product (GDP) grew by 5.3% in 2004 (at constant prices), with the non-oil private sector – which represents 44% of the economy – expanding by 5.7% in real terms. Some economists, however, dispute the GDP calculations and believe that the growth figure of 16.9% at current prices represents a more realistic measure.

Nevertheless, it is clear that the revenues and growth story, along with the current account surplus of $51.5bn and fiscal surplus of $26.1bn, represent a bumper year for the kingdom and an aggressive response to those focusing on the risks the country faces.

In their latest Article IV Consultation assessment, released on January 12, the IMF’s executive directors commended the Saudi authorities for “the economy’s strong performance, characterised by a marked increase in real GDP growth, low inflation, a declining debt ratio and stronger fiscal and external positions”. They attributed these impressive developments to the authorities’ “prudent macroeconomic management, efficient utilisation of oil resources, and steady implementation of comprehensive structural reforms over the past several years” and agreed that the medium-term outlook remains “favourable”, but noted that “high unemployment and a rapidly growing Saudi labour force pose serious challenges”.

IMF recommendations

The IMF continued: “These problems will require expanding non-oil growth over the medium term and sustaining structural reforms to enhance the competitiveness of the private sector, foster economic diversification, and reduce the vulnerability to oil price fluctuations.”

If 2004’s non-oil growth is any indication then jobs will be forthcoming. But as Sama governor Hamad al-Sayari told The Banker: “New ventures, in banking and insurance, for example, will create jobs but the issue as regards Saudis is getting the right skills and the quality jobs. There is no shortage of jobs in the kingdom; we have six million expatriates who transfer $16bn home each year. The key is for Saudis to get jobs with salaries that can support their families.”

While the macroeconomic picture and the IMF outlook remain positive, rating agencies (namely Standard & Poor’s) continue to refer to social and political uncertainty and the possible departure of senior expatriates for security reasons. These negative aspects have not been helped by British Airways’ decision to stop flying to the kingdom from March.

Nevertheless, the economic outlook could not look better. In 2004, Saudi oil prices averaged $35 per barrel against a budget based on an estimated $19 per barrel. In 2005, demand seems likely to remain strong as the global economy continues to grow at a reasonable rate, China’s oil needs increase and the tensions that fuelled some of last year’s price seem unlikely to disappear.

Samba’s Mr Bourland believes that prices for Saudi oil will average $30 per barrel for the year, and production will decline modestly from the nine million barrels per day average of 2004, resulting in lower, but still strong oil export revenues of $90bn. This scenario is again likely to result in budget and current account surpluses, as well as debt relief, as the 2005 budget is estimated to be based on an oil price of $25 per barrel.

End of old price models

This relatively conservative oil scenario is subject to both the vagaries of the oil market and domestic political considerations, but 2004 appeared to be the year when oil prices shifted up a gear and old price models based on $23-28 oil were discarded. Oil appears to have moved into a new higher range but it is only one of the factors behind the current economic boom.

While Saudis usually adopt an ultra-conservative stance when it comes to financial forecasts, it is hard to ignore some core fundamentals. Analysts suggest that some of the key government spending in 2004 will not be seen until this year and the real impact of the CMA, the expanding capital markets and the expansion in the banking sector will not be felt until this year.

With a number of other legislative changes in place, such as the Insurance Law, the non-oil private sector is set to take full advantage of the new environment and the positive oil factor. The structures are now in place for an even more impressive performance in 2005 than in 2004.

Was this article helpful?

Thank you for your feedback!

Read more about:  Middle East