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Saudi macro | Off-budget spending to restore growth momentum

Aramco IPO comes as a breather to Saudi economy. The 1.5% listing of Aramco, at a valuation of USD1.71tn, is expected to raise USD25.6bn, equivalent to 10% and 40% of the government’s budgeted expenditure and capex, respectively. This provides potential off-budget spending that will allow non-oil GDP to accelerate to 2.9% in 2020e vs. 2.8% in 2019e. We deem this necessary, given Saudi’s production of 10mn bpd in 2020, in our view, which would keep oil GDP growth relatively subdued at 1% in 2020e. We anticipate the aforementioned dynamics to push real GDP growth to 2.4% in 2020e vs. 0.90% in 2019e.

Downplay impact on liquidity amid banks’ current capacity. Assuming 10% foreign participation, local coverage is estimated to stand at cSAR86bn, representing 5.7% of Saudi banks’ total deposits and 6.4% of total credit. Saudi banks currently operate at an LTD of 79% vs. the regulatory cap of 90%. Although we expect the PIF to utilise at least SAR50bn of the IPO proceeds to finance domestic projects (as per its 2020 target vs. a baseline of SAR32bn in 2017), we believe these funds will initially be deposited back into the banking system and utilised over a period of one year, mitigating the effect of an immediate liquidity shock. We also expect the government to continue relying more on international issuances to finance its needs in 2020e, a trend that started in 4Q16 upon the introduction of its international issuances.

Potential pick-up in construction activity to spill over on credit and consumption. We see the construction sector as one of the top performing in 2020, supported by the potential rise in off-budget spending. Saudi’s 2020-21e advanced stage pipeline includes USD62bn worth of projects and an additional USD219bn in the early stage, USD82bn of which is construction. Accordingly, we estimate the construction sector to grow by 3.5% in 2020e. Given the correlation of 80% between construction credit growth and construction awards since 2013 (except 2017), we see strong potential for credit activity growth to reach c8.5% by 2021e (2015 levels), before starting to ease on a more stable outlook. We expect consumption growth momentum to remain at c3.4% in 2019e and 2020e vs. 1.8% in 2018. This should rise to 5% in 2021e, on the second round effect of the pick-up in construction activity.

Aramco to capture 14.4% of MSCI Saudi IMI, raising Saudi weight in MSCI EM by 0.40% to 3.01%. We expect the inclusion of Aramco, before 17 December as per the latest MSCI release, to trigger passive flows of USD1.90bn into the Saudi market, in light of its expected weight increase. Meanwhile, we look for Aramco to capture a higher share of flows of USD2.65bn, as capital rotation takes place among the Saudi index’s constituents. We do not see significant impact on the other MENA markets under coverage, as we expect outflows/market cap to stand at a mere 0.03%.