EUR 29.87 For Business Accounts Only

Saudi macro monitor | Improving dynamics; Capturing full recovery in 2022e

Positive outlook, backed by oil dynamics, off-budget spending plan. We expect to see Saudi’s budget deficit narrowing to 4.0% of GDP in 2021e (oil assumed at USD65.0/bbl) and 3.3% in 2022e (oil at USD68.0/bbl) vs. 11.4% in 2020, and deficit financing to stem primarily from debt (covering 80%), followed by the current account and privatisation revenues and reserves. We see non-oil GDP growth underpinned by the: i) boosting off-budget investments (PIF commits to invest SAR150bn locally), ii) gradual easing of local restrictions and travel bans, as the vaccination campaign is 43% done and due to be complete by end-2021, and iii) likelihood of a lower VAT next year. We look for total GDP to grow 4% in 2022e, after contracting by 0.5% in 2021e and 4% in 2020.

Rebound in oil revenues provides fiscal stimulus space; Sustain SAR peg. Higher oil revenues (+24% y-o-y in 2021e and +11% in 2022e) should not just reduce the need for consolidation measures, but also help accelerate the reduction in VAT to 5-10% by 2022e, conditional on oil >USD68.0/bbl in 2022e. Also, oil revenues provide financing for public investments in the private non-oil sector. Despite the government’s diversification efforts, there remains a c70% correlation between oil revenues and non-oil GDP. Higher oil revenues should also result in a current account surplus of 0.6% of GDP in 2021e, widening to 4.6% of GDP in 2022e, on our figures, which is key for peg sustainability.

Drivers to non-oil growth: Investment momentum, easing restrictions and tourism recovery. We see private consumption (30% of non-oil GDP) recovering to pre-pandemic levels by 2022e on the eventual lifting of restrictions, corresponding with the 1.3% y-o-y growth recorded in 1Q21 (vs. -3% in 2020). We also expect the removal of travel bans to restore 60% of 2019 inbound travellers by 2022e. This alone would contribute to 1% of non-oil GDP growth, after accounting for local spending lost on outbound tourism. As such, we see non-oil GDP growing at 3% in 2021e and 2022e, up from -4% in 2020. This is further supported by our expectation for budget and off-budget spending both growing at 8% p. a..

Saudi valuations are at a premium to GCC, on mounting liquidity; 2022e P/E of 18.3x vs. 16.2x. Other than high liquidity, increased foreign ownership (at a peak of cSAR260bn, up 25% y-t-d) has driven up multiples, with further room to increase, given current average holdings of 5% vs. 49% FoL. That said, there is divergence among sectors, and we see pockets of value in banking stocks, as opposed to healthcare (which trades at the steepest premium, 2022e P/E of 30x) and consumer (2022e P/E of 25.3x). SABB [Overweight | TP SAR31.8], SNB [Overweight | TP SAR60.0], Alinma [Overweight | TP SAR22.5], and BJAZ [Overweight | TP SAR19.5] are our top banking sector picks.