Samba expects real GDP growth to reach 4 percent this year, gather strength next year as private confidence hardens and reach 4.7 percent in 2012. Inflation is expected to remain manageable, and the fiscal and balance of payments' outlooks are comfortable, the report said.
Latest data from the Saudi Arabian Monetary Agency (SAMA) show that commercial bank lending to the private sector has continued to recover, with lending growing by 3.2 percent in the 12 months to April. This is the fourth consecutive month of year-on-year increases and suggests that the credit cycle has now turned.
One factor that has encouraged banks to expand their loan books is the slim returns available on government debt. Bank purchases of treasury bills rose sharply in the first quarter, particularly at the longer end of the curve. In response to burgeoning demand, SAMA tripled auction amounts from SR3 billion to SR9 billion a week. However, in recent months yields have been reduced sharply and banks' appetite for new issues is waning, the Samba report said.
Corporate loans
Following careful scrutiny of existing corporate loan books, banks are in large part confident that the worst has now passed and that defaults of the scale witnessed last year are not in the offing. Consequently, both working capital and new funds for investment are being extended. This is not to say that banks have totally shaken off their caution: Pre-crisis "Dubai-style" lending of 3-5 year loans based on little more than the expectation of rising asset values is not being contemplated. Instead, there is a growing emphasis on structured facilities, amortized cashflow and collateral.
Project financing
On the project finance front, schemes having strong sponsors are continuing to win favor, with Saudi Aramco's Jubail petrochemical/refining joint venture with Total of France commanding very keen spreads. Nevertheless, abundant liquidity and increased competition among banks means that spreads have fallen across the board, with pure private sector construction projects able to secure spreads of 150-200 basis points over SIBOR, down from well over 300 bps a year ago, the Samba report said.
Data from MEED Projects underscore the pickup in project activity. The cumulative value of contracts awarded for projects in the execution phase reached $132 billion in the twelve months to mid-June. The public sector continues to drive the expansion, accounting for some 62 percent of total awards, and registering particularly strong growth in April and May, when $50 billion worth of awards were made. However, private sector awards have also surged, with $30 billion of awards during April and May.
Mortgage law
Consumer lending remains capped by mandated borrowing limits for individuals. It is understood that mortgage lending will not be bound by these limits and banks are awaiting the final approval of the long-awaited mortgage law with considerable anticipation. In the first instance, the law would allow banks to tap into considerable pent-up demand for housing among Saudi nationals, the majority of whom do not own homes.
Despite the heightened anticipation, there are no clear signs that the law will gain final approval this year.
Retail indicators
The general direction of retail activity remains upward, though there was some cooling in April. Latest data from SAMA show points of sale transactions growing by 19 percent in the 12 months to April, down from 23 percent in March. Growth in private sector import demand also cooled, though spending in April was still firmly positive with new LCs 23 percent ahead of last year.
Oil prices
Private consumption is being supported by a number of factors. Oil prices remain extremely high by historical standards. The latest sell-off in equity markets saw prices fall by more than $15 a barrel; yet despite the extreme uncertainty, they held above $65 a barrel and have since recovered to around $75 a barrel.
The stock market
Until May, consumers had also been encouraged by a stronger performance by the local stock market, with the Tadawul All-Share Index (TASI) up 13 percent in the first four months of the year. The mid-May sell-off of global equities was replicated (and even amplified) in the Saudi market, and the TASI lost 14 percent during the course of the month, with a 7 percent drop on May 25. However, the TASI has still comfortably outperformed most emerging market bourses this year. In mid-June the year-to-date change was -0.1 percent, compared to an 11 percent decline for the MSCI Emerging Market index.
The TASI will no doubt remain volatile — as will global markets — but local sentiment should firm as the year progresses. With the shadow of last year's local corporate debt problems receding, investors are now refocusing on the positive impact that robust government spending and accelerating private consumption growth will have on corporate balance sheets this year.
Saudi crude oil output picked up to 8.15 million barrels per day in May, according to MEES, following a similar small increase in April. This is still slightly below the level reached toward the end of last year, but the trend is upward and Samba expects production to average 8.27 million barrels per day this year, a 2 percent increase on 2009.
Drawing these strands together, Samba sees real GDP growth reaching 4 percent this year, with the nonoil sector also expanding by 4 percent. However, in the wake of last year's near contraction, this rate will "feel" much better. Growth should gather strength to 4.5 percent next year, as private confidence hardens, and should reach 4.7 percent in 2012.
Inflation
Inflation moved sharply higher in May, with data from the Central Department of Statistics putting the 12-month rate at 5.4 percent, up from 4.9 percent in April. The surge was a surprise since historically this time of year sees price pressures ease. The month-on-month increase was also significantly stronger than in prior months. The main driver was rents, with the month-on-month rate gathering pace in line with the recovering nonoil economy. However, food prices fell in April and remained subdued in May, as the lagged effect of dislocations in the global sugar market began to ease.
Rents are likely to remain on an upward track given the outlook for the domestic economy, but external factors will help dampen price pressures to a certain extent: Global agricultural commodities prices are softening quite rapidly, while inflation and inflationary expectations within Saudi Arabia's main trading partners are muted. Samba therefore thinks inflation will average 5 percent this year, edging up to around 5.2 percent in 2011-12 as trading partners' inflation returns to historical averages.
