Editor’s Note:
Today we provide for your consideration the May 2010 bulletin from Jadwa Investment in Riyadh. It examines the new balance of payments data for 2009 and the interesting trends revealed therein. We thank Jadwa’s Head of Research Paul Gamble for sharing this valuable report with SUSRIS readers.
[Complete report with charts, graphs and tables at this link.]
Jadwa Investment Monthly Bulletin – May 2010
New trade data highlights important trends
Recently released detailed data on trade and the balance of payments in 2009 reveals some interesting trends. High oil revenues ensured healthy surpluses on the trade and current accounts, though both were well down on the all-time highs of 2008 due to lower oil prices. Imports also declined and fall was roughly the same proportion among all leading trading partners, regardless of the pace of growth in previous years. Elsewhere, a reduction in payments to foreign services providers suggests a growing domestic capacity, income from foreign investment held up much better than anticipated and expatriate remittances surged again.
The new data put the Kingdom’s trade surplus at $107.4 billion last year, less than half of the 2008 level and the lowest since 2004. This was not a surprise given lower oil prices and production. Non-oil exports and imports also fell, by 16 percent and 19 percent, respectively. These two figures were in line with the preliminary estimates released in the budget statement, but the oil export total was higher, at $162.6 billion against the earlier projection of $157.4 billion.
The fall in non-oil exports was the result of lower revenues from petrochemicals, plastics and metals. These three categories account for 53 percent of non-oil exports (71 percent if re-exports are excluded) and the prices of all were hit by a drop in global demand last year. In contrast, exports of foodstuffs rose and are now almost double their 2006 level. Re-exports (goods imported into the Kingdom and then transferred directly to other countries) jumped by 35 percent last year, which is surprising given that demand across the region was subdued.
Almost all categories of imports fell last year. The largest decline was for imports of base metals, the third largest type of import, which were down by 40 percent owing to lower international prices. Imports of machinery, which constitute 29 percent of total imports, were only 12 percent lower, reflecting the ongoing industrial development within the Kingdom. Transport equipment, which makes up 17 percent of total imports, fell by 20 percent, probably the result of lower imports of cars.
Imports were down from every trading partner where they exceed SR1 billion apart from Austria. The fall was broadly consistent across trading partners; 18 percent for Asia, 14 percent for the EU and 15 percent for North America. Consistent with this pattern, imports from China, which had surged in previous year to make China the second largest supplier to the Kingdom (behind the US), were down by 15 percent. Imports from other GCC countries were down by only 6 percent, though this was heavily influenced by re-export trade.
A breakdown of total exports has yet to be published. The breakdown for non-oil exports shows that the UAE was the largest destination, accounting for 19 percent of the total. Again, the bulk of these were re-exports. China is now the second largest destination for non-oil exports from the Kingdom. Non-oil exports to China were worth SR8.8 billion last year, exceeding the value of total exports to China in 2001. They were only SR1 billion below non-oil exports to the whole of the EU and over three times greater than the value of non-oil exports to the US.
Another surplus was recorded on the current account, which includes payments and receipts for services, incomes and transfers abroad, in addition to the trade in goods. At $26.5 billion, the current account surplus was bigger than the preliminary estimate of $20.5 billion published in the budget. 2009 was the eleventh consecutive year that the Kingdom has posted a current account surplus, though the total was 80 percent lower than in 2008 because of the fall in oil export revenues.
One important trend that emerges from the services account is the fall in payments to many foreign service providers. The slowdown in the economy last year influenced this, but the decline appears to be part of a longer-term pattern. Payments for imported construction and financial services were $4.5 billion last year compared to $8.8 billion in 2007. In addition, receipts for use by foreigners of insurance, financial and communications services originating from within the Kingdom rose to $1.5 billion from $0.2 billion over the same period. This data illustrates the growing ability of local service companies to satisfy the needs of the local market and to begin to address the needs of companies in other countries.
The income balance is dominated by income earned on the government’s foreign assets. We had anticipated a significant drop in this due to much lower average yields on US government bonds, which we think constitute the bulk of SAMA’s foreign investment portfolio. In fact, income from portfolio investment was little changed, at $14.2 billion, though there were falls in other types of investment income.
Remittances by expatriate workers make up the bulk of current transfers. Remittances increased by 57 percent last year and are up by $9.2 billion since 2007 to stand at $25.2 billion. The increase can be partly attributed to the rise in the number of expatriate workers in the Kingdom, though it runs well beyond the growth in the number of work visas issued; higher wages for expatriates could also be a factor. The better capture of remittance flows is likely to be a key reason for the jump, as more money transfers are undertaken through the banking sector. Nonetheless, it is likely that the data understates the true level of remittances.
While we think that the new data provides a good guide to what happened in the economy last year and highlights some important trends, one note of caution is the very large total for errors and omissions. This features things not captured or incorrectly captured in the rest of the breakdown. Last year, errors and omissions amounted to $40.3 billion, greater than total investment income and non-oil exports combined. Major revisions in the capital and financial account also raise doubts about some of the figures.
We have changed our forecasts in light of the new data, raising our projections for oil revenues, investment income and workers’ remittances, among others. This results in a larger projected current account surplus for 2010 and 2011. We now forecast a current account surplus of $45.3 billion (10.9 percent of GDP) in 2010 and $41.9 billion (9.4 percent of GDP) in 2011, up by $8 billion and $7.6 billion from our previous projections, respectively. This is a very healthy current account position and should allow a further increase in foreign exchange reserves.
Stock market watch
SAMA data good guide to bank profits
Monthly bank profit data published by SAMA has been attracting a lot of attention due to investor interest in the health of the banking sector. We find that the SAMA numbers are generally a good fit with actual bank performance, though there can be large discrepancies at times of extreme financial market volatility.
In recently quarters, investors have reacted to the publication of bank profit data by SAMA. As the data is issued monthly, while banks only report on a quarterly basis, the data for the second month of each quarter is of particular interest. The November 2009 numbers, issued in December, caused the TASI to slip by around 2 percent; there was less of a reaction in March when the February numbers were released as it was the final day of the quarter. (Note that banks issue their quarterly results before the SAMA data for the final month of the quarter is published.)
We find that in general the SAMA data is a good proxy for actual bank profits. The chart to the left compares the data from SAMA on a quarterly basis and the profits recorded by all the listed commercial banks and National Commercial Bank. It shows that the average discrepancy between the two series from the first quarter of 2006 and the first quarter of 2010 is 4.2 percent. If the third and fourth quarters of 2008 and first quarter of 2009 are excluded the discrepancy is just 0.5 percent.
The reason for the large divergence between the two measures in these quarters is unclear, but probably reflects an incomplete capture of investment write-downs in the SAMA data. Those quarters where the discrepancy was the largest were those that encompassed the plunge in global asset values plunged between September 2008 and March 2009.
Nonetheless, SAMA’s methodology seems sound. Banks only report their profit data on a quarterly basis, so the SAMA numbers are derived from changes in the capital account of the banking sector. The profit figure appears to be the funds remaining in the capital account once paid-up share capital and statutory reserves have been accounted for. This primarily consists of retained earnings and also includes changes in the value of investments categorized as available for sale, non-trading investments and provisions for impairments of financial assets.
Data for recent quarters suggest that the relationship between the SAMA data and bank results has returned to normal and that the monthly numbers will provide an important guide to the performance of listed banks. Under both measures bank profits were down in the first quarter of 2010 compared with the same period of last year, but were well up on the final quarter of 2009, when banks undertook significant provisioning for bad debts. Total bank provisions in final quarter were SR5 billion, compared to SR2.2 billion in the first quarter (and SR2.4 billion in the third quarter of 2009). We expect bank profits to improve during the year as lending pick up, earnings from capital market activity improve and less funds are set aside to provision for bad debts.
[Complete report with charts, graphs and tables at this link.]
For comments and queries please contact the author:
Paul Gamble, Head of Research
pgamble@jadwa.com
or:
Brad Bourland, CFA, Chief Economist
jadwaresearch@jadwa.com
Head office:
Phone +966 1 279-1111
Fax +966 1 279-1571
P.O. Box 60677, Riyadh 11555
Kingdom of Saudi Arabia
Other Information:
- Jadwa Investment April 2010 Bulletin – SUSRIS – Apr 28, 2010
- U.S. Exports to Arab World Rebounding – SUSRIS – Apr 16, 2010
- Saudi Economic Trends – Jadwa Chartbook – April 2010 – SUSRIS – Apr 6, 2010
- Saudi Economic Trends – Jadwa Chartbook – March 2010 – Mar 9, 2010
- The Saudi Economy in 2010 – SUSRIS – Feb 13, 2010
{ 2 trackbacks }
{ 0 comments… add one now }