January2019

We are pleased to present our Saudi Arabia 2019 Outlook report, which articulates our view on Saudi Arabian economy, equity markets, real estate and private equity space for the year.

We remain positive on the macroeconomic scenario in Saudi Arabia, which has witnessed a significant turnaround in 2018. The economic growth has revived, with the estimated GDP growth rate of 2.3% for the year. Bank credit growth has returned to positive territory during the second half of 2018, after a prolonged period of de-growth. Private consumption indicators have also shown considerable improvement over the previous year. The government is pursuing an expansionary spending policy in 2019 with the largest ever budget, aimed at boosting non-oil economic growth and speeding up the implementation of Vision 2030 initiatives. We expect the increased capital expenditure in 2019 to support the growth in non-oil sector. The extension of cost of living allowances for one year would support consumer spending as well. However, volatility in oil prices remains a key concern for KSA’s fiscal deficit and overall economy in 2019.

We also remain optimistic about equity market, which is set to benefit from the expansionary spending policy in Budget 2019, especially 20% YoY rise in capital expenditure (beneficiaries – construction, cement, capital goods sectors). Also, 20% YoY rise in social benefits’ spending and improving indicators of private consumption spending augur well for consumption related sectors such as retail and food and beverages. Saudi Arabia’s inclusion in Emerging Market (EM) indices by MSCI and FTSE in 2018 is a major milestone for KSA, and FIIs are expected to increase their inflows in the stock market during 2019 when the actual inclusion takes place. The key point to watch out for is valuations.

Saudi real estate sector is still facing challenges, due to uneven demand. Despite this, the long term outlook for the sector remains positive. The emergence of social reforms including opening of cinema market in the country could help in demand for shopping malls, which would in turn drive demand for retail real estate. The smart cities like NEOM and King Abdullah Economic City could drive the demand for commercial real estate. The construction sector appears set for expansion in 2019 as economic diversification efforts gathers pace. Moreover, Saudi Arabia is launching various affordable housing programs, real estate public-private-partnerships, and mega projects to spur real estate sector’s growth in the country.

We also remain long term positive on the private equity market, which continues to gain traction along with rest of economy, albeit in sectors other than real estate. Private equity investors are increasing fund raising and seeking investment deals in specific sectors – such as healthcare, education predominantly – which have long term demographic drivers and are expected to benefit from government’s privatization drive.

Overall, the year 2019 promises to be a continuation of turnaround for Saudi Arabian economy, with continued government spending, support to consumers and reforms agenda. The formal inclusion of Saudi stocks in FTSE and MSCI indices should lead to greater foreign equity investors’ inflows. Oil prices are volatile at the movement but the planned production cuts would help reduce the demand supply gap and provide greater stability to prices. The key risks include sustenance of consumer demand, more than two rate hikes by US Fed, oil price volatility due to rising US shale oil production, among others. We expect the Saudi government to monitor these risks and respond accordingly, thereby helping the economy remain on path for future growth

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Saudi Arabia 2019 Outlook

January2019

We are pleased to present our analysis of KSA’s GDP in Q3 2018, which indicated that the economy continued to expand during the third quarter of the year.

The key highlights are:

• KSA’s Q3 2018 GDP rose 2.5% YoY to SAR 653.7 bn compared to SAR 638 bn in Q3 2017. The GDP growth accelerated from 1.6% recorded in Q2 2018, and is the fastest quarterly growth since Q1 2016.

• Oil sector GDP growth accelerated to 3.7% YoY in Q3 2018, from 1.3% YoY in Q2 2018. The sector contributed 44.3% to the total GDP in Q3 2018, higher than 43.7% in Q2 2018 and 43.8% in Q3 2017.

• The GDP growth of non-oil sector slowed down to 2.1% in Q3 2018, from 2.4% in the previous quarter.

• Sectors including Transport & Communication (+4.9% YoY), Electricity, Gas & Water (+4.4% YoY) and Mining & Quarrying (+4.2% YoY) witnessed strong growth during Q3 2018. On the other hand, the Construction sector GDP fell (-3.6% YoY) for the 11th straight quarter.

For any feedback or suggestions, kindly reach out to investmentresearch@mefic.com.sa
Saudi Arabia Q3 2018 GDP flash Report