JEDDAH: Saudi Arabia’s real GDP (gross domestic product) growth is expected to increase by three percent in 2010 because of the Kingdom’s aggressive fiscal policy plan which emphasizes capital expenditure as well as indirect fiscal stimulus to the non-oil sector.
In a special report assessing implications of the global financial crisis for Saudi Arabia, the Jeddah-based Financial Transaction House (FTH) said the growth projections were based on a recovery in global demand and a higher oil production level.
With Saudi Arabia’s real GDP growth contracting by one percent this year as a result of the marked fall in oil production levels, in addition to the expected slowdown of growth in the non-oil sector due to weakening private consumption and investment expenditures, the government investment expenditure in 2009 is expected to provide the largest contribution to growth.
“Maintaining a proactive fiscal policy and facilitating the availability of liquidity by the Saudi Arabian Monetary Agency (SAMA) has been essential in maintaining the Saudi economy,” Faisal H. Alsayrafi, managing director & CEO of FTH, said. Because of SAMA’s bold policy, Saudi interbank rates have fallen and deposits are now growing faster than lending, bringing the loans-to-deposit ratio down to 77 percent.
“Banks have been very stringent in passing on this facility to private customers, and as a result, we see that private sector credit has not achieved the anticipated growth we had hoped for,” Alsayrafi said, adding in an effort to further strengthen private demand for lending SAMA is likely to keep rates low for the remainder of the year, but a slightly higher rate is expected as the Federal Reserve is likely to gradually tighten monetary policy in 2010.
The FTH report said Saudi banks had entered the crisis in a strong position compared to other financial institutions in advanced economies. While the Saudi banking sector was able to absorb most of the initial impact of the crisis, the challenge now is how to deal with the second round effects owing to slowing domestic demand, consumer consumption and the effects of oil prices. Global financial markets have begun to show signs of stabilization, however many remain skeptical about news that markets will show significant improvement before the end of the year. Nonetheless, confidence levels have improved moderately, with rising oil prices and expectations of a faster recovery in global demand by 2010. This is reflected in a rising stock market and the return of IPO (initial public offering) and sukuk issuances.
Tadawul
When assessing IPOs in the Gulf region, the FTH said we saw that IPOs in the Kingdom had not slowed down in early 2009; however we did see a comeback of IPOs in Q2 and Q3, although most were par offerings. Premium offerings were definitely negatively impacted for various reasons; valuations of companies witnessed significant drops, which meant shareholders were no longer willing to sell; shareholders and investment banks were worried that premium offerings would not be justified or covered; and liquidity was still an issue in this region with many investors losing money in the downfall of the markets. In an effort to solve these obstacles, many companies have chosen to postpone their IPO plans.
The Capital Market Authority (CMA) has tried to stabilize the market, however there is still a lag in investor confidence. Global trends in international markets, as well as regional and international news, especially regarding crude oil prices, all have important effects on the direction of TASI (Tadawul All-Share Index). With the Saudi markets being closely correlated to the movement of the US markets, the CMA’s efforts and their effects can only go so far in improving the market stability and condition, the report added.
In an attempt to further strengthen the local market, the CMA has tried to implement various rules in making TASI more accessible. For example, last year, Tadawul implemented the transparency rule, where it named investors with 5 percent or more stakes in any company. Although there was a lot of hesitation regarding the CMA transparency rule, this is definitely a move in the right direction.
“Market transparency is a core practice in any developed market, and we hope that increased transparency will in turn lead to increased consumer and investor confidence in the market,” Alsayrafi said.
Furthermore, Tadawul has opened its doors to expatriates, who were limited to investing in the stock market through mutual funds. Expats can now buy and trade shares on Tadawul just like Saudis; however they are stilled barred from IPOs.
One problem that Tadawul faces is that the market is dominated by day traders, however, the CMA has been unable to do anything about it; any measure by the CMA to limit day trading will lock up liquidity, which will ultimately affect market liquidity, the report said.
The Saudi stock market has recently broken back above the 6,500 threshold, and liquidity of over SR5 billion has become common once again. There are worries that these gains are unsubstantiated and built on speculation, however there have been indications that although the market has yet to recover, steps taken toward recovery are apparent.
The FTH report said combined with the Kingdom’s apparent resilience, we would expect the TASI indicator to continue to explore higher ground, however it would be important for the market to grow steadily, and we would not be surprised if the market took a retreat in order to garner upward momentum.
(To be concluded)
