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Saudi Arabia’s stock market is expected to carry forward the positive momentum it witnessed in 2007, according to new economic forecasts for the country.
A favourable economic environment in the Kingdom and increasing government spending on infrastructure are two factors that will support the market’s performance, Kuwait-based Global Investment House (GIH) said in a recent study.
The positive momentum in 2008 will also be sustained by lower interest rates – and the expectation that lower rates will continue in the foreseeable future – as well as increasing private sector participation, investment and higher corporate earnings, GIH said.
According to the report, 2007 was a rebound year for the Kingdom in terms of stock market performance, with the index rising by 41 per cent against a fall of 53 per cent in 2006.
A significant contributor to the overall gain in 2007 was the major surge in December, which saw the index post a return of 18 per cent.
A major increase in market capitalisation was witnessed in the newly liberalised insurance sector.
According to GIH, the industrial sector accounted for the most shares on the market last year at 39 per cent (SR755bn), followed by banking at 30 per cent (SR583bn).
Stock market volume during 2007 rose by eight per cent to 58.86 billion shares, against 54.44 billion shares during 2006, with insurance sector volumes increasing the most followed by the banking and industrial sectors.
However, the value traded last year declined by 50 per cent despite marginal increases in volume traded, indicating dominance of mid cap and small cap stocks in the trading segment, the report said.
“Except insurance all sectors witnessed a fall in value traded. Industrial and services sector continue to dominate the value traded by accounting for 70 per cent of total value traded,” GIH said.
“The major reason for the drop in the profitability in 2007 was the decline in fee-based income from stock market,” the report said.
The investment house said it expects Saudi’s banking sector to face tough competition from foreign banks, adding that areas ready to be tapped include affluent banking, small to medium enterprise banking, mortgages and Islamic banking.
The Saudi Government is striving for a diversified, private-sector driven economy through its “Vision 2025” strategy that aims to provide job opportunities, quality education, healthcare facilities and necessary skills to ensure positive growth momentum.
The proposed plan’s main goal is to more than double per capita GDP from its current level of SR43,300 at the beginning of 2005 to SR98,500 in 2025.
Other long-term goals include boosting investments in both public and private sectors to help fuel economic growth.
The country’s economy is expected to grow at an average annual rate of 9.3 per cent during the strategy period.
According to the report, it is estimated that the nominal GDP for 2007 will exhibit a growth of 8.1 per cent to SR1,414bn while the real growth is expected at 3.5 per cent to SR827bn.
Corporate tax of foreign-owned firms has been reduced in the past few years to 20 per cent from 45 per cent, which has helped see a rise in foreign direct investment inflows from $183m (Dh672m) in 2000 to $18.2bn in 2006.
The authorities are looking to attract $300bn worth of investment in energy-intensive industries over the next 13 years.
A further $100bn of investments is also being sought for knowledge-based industries and a similar amount for transportation ventures, GIH said.
The firm said investment levels in the country are sure to rise due to transport developments, the construction of six new cities, liberalisation initiatives, oil and gas ventures, as well as the variety of industrial projects being undertaken.
The Kingdom – which benefited from accession to the World Trade Organisation three years ago – intends to be among the top 10 competitive nations in the world for inward investment by 2010 as part of its “10x10 strategy”.
Saudi Arabia’s 2008 national budget projected revenues of SR450bn and expenditure of SR410bn, resulting SR40bn surplus.
The revenues are 38 per cent lower than the 2007 estimates of SR621.5bn.
“Budget 2008 is a continuation of the government focus on optimising the available resources and giving priority to social infrastructure and services especially in education, health, social affairs, municipal services, water and sewage, and roads,” GIH said in its report.
“The budget [also] put special emphasis on projects related to research and development and e-government, in addition to capital expenditures that will create more job opportunities, enhance economic activities and boost economic growth,” the firm added.
The Saudi Government has been using its fiscal surplus in the past few years to settle part of its outstanding public debt.
The country has reduced its public debt burden from 92 per cent ($173bn) of the GDP in 2002 to 27.9 per cent ($97.2 bn) of the GDP by 2006 as a result of a debt reduction strategy and successive high growth rates.
It is projected to go down further to 18.19 per cent ($71.2bn) by 2007. GIH said it expects the debt reduction policy to continue in the wake of strong surplus that the government is expected to generate.
“This is also needed as the government will have to reduce its budgetary deficit to meet the convergence criteria of the GCC Common Union,” the firm said.
One of the criteria recommended for GCC countries is a three per cent ceiling of a member state budgetary deficit, in any year, to its GDP.
Public debt should not surpass 60 per cent of its gross domestic product as well, and foreign-exchange reserves are to stay above four-month imports value.
According to the report, Saudi Arabia’s debt position is now comfortable as approximately 70 per cent of outstanding debt is owed to government agencies [the pension funds] and does not pose any financial risk.
All of the debt is domestic as well, so there is no exchange rate risk.
GIH said it expects recent measures taken by the Saudi Government to control the rising inflation to work in the short term, but warned that the government must do more to avoid the inflationary scenario like other GCC countries.
“The recent move of the GCC countries to move to a common currency by 2010 will produce desired results, provided it happens by that time,” the investment firm said.
Inflation in the Kingdom reached 4.1 per cent in 2007 from 2.2 per cent a year earlier as prices of food and rent increased seven per cent and eight per cent respectively last year.
“Diversion of excess cash balances to the real estate sector is still pushing land and real estate prices up across the Kingdom, particularly in the major cities and in areas adjacent to the currently constructed economic cities,” GIH said.
Although the country’s inflation rate is low compared to other GCC economies, such as the UAE and Qatar, it is a significant increase for an economy with historic average inflation of around one per cent, the report said.
The lower inflation in Saudi is due to the high subsidies provided by the government, which spends about SR12bn annually on direct subsidies.
To control rising inflation, the country has also come up with a series of urgent measures that are expected to remain in effect for the next three years.
One of the main steps is a 50 per cent reduction in fees collected by state-owned ports on imported commodities.
The government is also set to bear 50 per cent of the charges of passports, car registrations, car ownership transfer and the renewal of residence permits for domestic workers.
“Inflation in the Kingdom is not simply a homegrown problem but is increasingly related to cost-push inflation, itself a result of the weak US dollar and the currency peg, which is hindering their currency appreciation and fuelling the inflation,” the report said.
According to GIH, Saudi Arabia’s construction sector is to grow rapidly over the next few years due to the steep rise in oil prices, the launch of new economic cities and industrial zones and increasing population.
Construction has accounted for about nine per cent of the Kingdom’s non-oil gross domestic product in the past few years and is set to extend further with the many projects still in the pipeline, the report added.
Credit facilities to the industry have continued picking up since 2002, as commercial banks drastically expanded their credit portfolios in the last three years due to improved liquidity.
According to data from Saudi Arabian Monetary Agency (Sama), credit to building and construction sector reported the highest growth rates of 38 per cent, 19 per cent and 18 per cent in 2005, 2006 and third quarter of 2007, respectively.
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