Saudi to lead long-term growth in region
Strong drivers such as high savings, demographic bonus and pressing need for infrastructure spending will help Saudi Arabia to have a strongest long-term secular growth in the GCC, according to a Bank of America Merrill Lynch (BofAML) report.
The Saudi economy is poised for a big change but the change is happening gradually. The main drivers of the transformation such as opening up the financial market to foreign investors, introducing a mortgage law and developing economic cities are still in baby steps, said analysts in the research note, prepared after the second Saudi Arabia conference in Riyadh recently.
Besides the government spending on infrastructure, BofAML analysts said retail and construction sectors suggest strong growth stories even in the short term due to favourable demographics.
BofAML is bullish on the telecom, retail and construction growth in the medium term, and Saudi's large and closed domestic market offers an exciting growth opportunity in the long term.
"High savings, big demographic bonus and pressing need for infrastructure spending are big pluses. Hence we like Saudi Arabia not simply because it has oil, but rather how that oil windfall can reshape the country," said the analysts in the report.
Investors are bullish on the recovery of the Saudi petrochemicals industry with the ramp up in the utilisation rates but at the same time shortage of natural gas (feedstock for petrochemicals) is an area of concern.
Saudi Basic Industries Corporation (Sabic), world's leading petrochemical major, is upbeat on the improving global demand conditions and timely delivery of new mega projects.
Retail and construction
Despite a slowdown, the Saudi non-oil economy grew at the rate of 3.6 per cent in 2009, offsetting the sharp decline in oil production.
The healthy consumer sector and the construction activity supported by generous budget spending have been the main drivers and the demographics trends will keep those sectors well supported in the medium term as well, predicted the analysts.
They said 2009 was year of consolidation and deleveraging to some extent.
The sharp contraction in nominal GDP due to lower oil prices worked similar to a monetary tightening in Saudi despite government's successful counter-cyclical polices, said the report.
Saudi Bank offered an appealing long-term story given the solid liquidity position, cheap funding and better loan penetration outlook than Gulf peers.
However, investors remain hesitant about the short-term appeal particularly on the recovery in credit growth for 2010 and are cautious about further asset quality surprises for the bank driven by merchant family defaults.
BofAML analysts believe provisioning charges peaked in fourth quarter of 2009 and this was a view reiterated by the banks' outlook that the worst has passed on the asset quality front.
The analysts continue to expect slow recovery in the loan growth for 2010 at around seven per cent. However, the gradual recovery is already priced with Saudi banks trading at attractive valuations. Samba stood out for market share gain potential. There is scope for differentiation within Saudi banking system in a gradual recovery as the most liquid and best capitalised banks push through more quickly.
BofAML is more bullish on the outlook of the mobile data after meetings with kingdom's three operators Saudi Telecom Company (STC), Mobily and Zain KSA.
The key drivers in Saudi telecom markets are a little different to those witnessed globally. The outlook for the data growth and accompanying capital expenditures, the degree of regulatory action and the pace of competition are the key drivers, according to the report.
It said the data demand appeared very strong, especially for Mobily which is dominating this segment. With more than a million wireless data subscribers, 14 per cent of Mobily revenues are derived from data services compared to nine per cent a year earlier. This figure is expected to exceed 17 per cent by end-2010.
BofAML considered this to be a conservative estimate, given the recent demand trend and the apparent attraction of the data mobility in the Saudi lifestyle.
The investors are empathised with Saudi's long- term real estate potential but believed that banks and building material could be better growth vehicles to play infrastructure and population growth.
"The lack of mortgage financing, as well as potentially high acquisition costs, were seen as significant barriers to growth while demand is likely to be concentrated in the low range segments," noted a team of five research analysts and an economist at BofAML in the research note.
Household formation, job creation and demand supply dynamics are favourable for the Saudi real estate sector, which has tremendous "top-down" potential and at very early stages of development. Saudi has avoided the speculative boom-bust cycle of neighbouring peers as real estate was not driven by same external capital and expatriate flows.
Dar Al Akran remains the only listed "mid-cap" pure play developer with residential projects across major cities. However, the report pointed out that the opportunities for the equity investors will be defined by the evolving financing and regulatory environment, which present significant barriers to entry for large-scale private sector developments.
Most regional investors view real estate as "tier 2" beneficiary of public infrastructure spending, given the lack of development companies with scale, with banks and building materials taking "tier 1" status.
Saudi Arabia has about 260 billion barrels of oil reserves, about 24 per cent of the world's proven total petroleum reserves.
One of the biggest long-term drivers for Saudi economy is developing the economic cities. Given Saudi Arabia's massive excess savings, young population and need for a competitive non-oil economy that will generate jobs, the vision for building economic cities are justified. However, these projects rely more on private sector participation than government spending.
According to Bank of America Merrill Lynch analysts, there is not enough incentives yet for the private sector to push forward these projects once the basic infrastructure is completed.
Given the huge scale of these projects, the analysts believe the involvement of private sector depends on the long-awaited economic cities act, which will clarify the uncertainties regarding cities' governance, jurisdiction and the life standards.
The four cities under construction (King Abdullah Economic City, Hail Economic City, Madinah Knowledge Economic City and Jazan Economic City) are expected to host some five million people, generate 1.3 million jobs and almost double the per capita income in the kingdom.
The first phase of the King Abdullah Economic City, most developed among the four is expected to be completed by 2012.
The infrastructure for all economic cities are expected to be completed by 2025, said analysts.
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