September 2017

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Contents

Highlights 1 Global economy and markets 2 Oil markets 5 Saudi Arabia 7

James Reeve Chief Economist

Samba Financial Group

Dubai, UAE

+971 (0) 54777 2151

james.reeve@samba.com

July 2019

Economic Monitor

Highlights

The US-China trade dispute continues to weigh on global economic activity, with a number of manufacturing gauges dipping alarmingly in recent months. Part of this relates to supply chain disruption, but more reflects the toll on confidence and activity in China itself. This has meant reduced import demand for a range of commodities, capital inputs and consumer goods. The worry is that the resulting manufacturing weakness in other countries will begin to spill over into labour markets.

Some respite was gained at the G-20 summit in Japan, when the US and Chinese presidents agreed to restart talks aimed at resolving the dispute. Yet there is nothing to indicate any mutual softening of positions towards what are intractable issues. In essence, the US would like to see China’s government roll back its influence over the economy—while state intervention is in fact increasing under President Xi Jinping. Tensions are therefore likely to rise again before too long.

The US Federal Reserve has responded to growing investor

anxiety by indicating that it is likely to cut interest rates—probably more than once—before the end of the year. While this might revive risk appetite, it is unclear how rate cuts will provide a lasting offset to the problems associated with the trade dispute.

Given this backdrop it is understandable that oil traders are focusing on the demand outlook, largely shrugging off potential supply disruptions in and around the Straits of Hormuz. The IEA has sounded warnings about demand, and with US shale output gathering pace again, the OPEC Plus group has opted to roll over its output cuts for a further nine months. But unless the demand outlook unexpectedly improves, deeper cuts might be necessary.

Saudi Arabia, at least, can point to a number of positive developments. The impact of firmer government spending is now being felt across most of the economy, with even the hard-pressed construction sector posting growth in the first quarter. Consumer segments are also benefitting from strong real wage growth for Saudi nationals in the public sector, which has helped to offset the impact of departing expatriates. The upturn in activity has led us to raise our nonoil GDP growth forecast to 2.6 percent for the year.

Other encouraging news can be found in the balance of payments,

where private sector capital outflows have eased and foreign inflows (mainly portfolio) have accelerated.

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Global economy and markets

Global activity softens as trade tensions weigh

Global economic activity has softened appreciably so far this year, and alarmingly when judged from the most recent peak at the end of 2017. The JP Morgan global manufacturing PMI slid below the 50 mark separating contraction from expansion in May for the first time since 2016. A weighted average of the US and Eurozone composite PMIs points to advanced economy GDP growth slowing in Q2 to the weakest pace since 2012.

In the Eurozone there is a notable divergence between the export-dependent manufacturing PMI, which is on the slide, and the services PMI, which has held up well. There is a clear risk, therefore, that manufacturing weakness will infect domestic demand and service sector growth. It is notable that survey measures of employment intentions have taken a turn for the worse recently.

This potential exists in the US as well, though it should be emphasised that US households are in better shape than those in the Eurozone, with high employment, rising real wages and reduced leverage helping to boost consumer confidence. But this is in sharp contrast to investor confidence, which has been badly damaged by the US-China trade dispute. Firms are reluctant to expand their operations given the backdrop of tariff-related costs and disruption to supply chains. The Markit US Manufacturing Flash PMI slid to a record low of 50.1 in June. The Empire manufacturing survey, which measures business conditions in the industrial northeast, saw a startling drop of almost 9 points in June.

G-20 trade relief likely to be short-lived

Some relief was provided by the G-20 summit, at which the US and Chinese presidents agreed to re-start trade talks. But any “feel good factor” is unlikely to last. The issues at play have already shown themselves to be intractable, with the US essentially asking that China dismantles most of the state-led economic model that has served it so well for 30 years; indeed, under President Xi’s leadership the government has if anything become more interventionist. Meanwhile, Mr Trump’s rhetoric is likely to become more bellicose as the 2020 presidential election looms into view. Positions are therefore set to harden again and a lasting deal will likely remain elusive.

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Eurozone: PMIs (Markit)

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FOMC makes dovish pivot

The trade dispute is at the forefront of Federal Reserve calculations. The FOMC left interest rates unchanged at its mid-June meeting, but the accompanying statement and Chairman Jerome Powell’s press conference struck a decidedly dovish tone. If the key word in the March statement was “patience” with regard to rate changes, then the theme of the June statement was “uncertainties”. Mr Powell acknowledged to reporters after the meeting that the key question now is whether these uncertainties call for “additional monetary policy accommodation”.

The so-called dot plot of FOMC participants’ forecasts for interest rates was split on the possibility of a rate cut this year, but there was a notable downward shift in the projections for 2020. March’s projection of a median 2.625 for the Fed Funds Target Rate in 2020 was cut to 2.125 percent in the June projections—a 50 basis point reduction. The sheer scale of this change in the dot plot, along with the language, was enough for the markets to decide that a rate cut as early as July was a given--the only question being the size of the cut (more than two thirds expect just a 25 bps reduction). From there, most expect at least one more cut before the end of the year, with 40 percent anticipating two more.

We expect 75bps of cuts to Fed Target Rate by mid-2020

However, some cold water was poured on rate-cut expectations following the June non-farm payrolls report, which showed a 224,000 jobs gain, well above expectations of 160,000. That said, employment is a trailing indicator and although a July cut now looks a little less likely, we expect the data to deteriorate enough for the Fed to make two 25 bps cuts before the end of the year, leaving the FFTR at 2 percent. We think that a further 25bps cut is in prospect for 2020, which would leave the FFTR at 1.75 percent at the end of that year (economic conditions might call for an additional cut in 2020 but the Fed does not usually intervene in the run-up to a presidential election). Given the exchange rate peg, the Saudi central bank is likely to follow suit by cutting its repo and reverse repo rates by the same degree.

There is little in the way of inflationary pressures to hold back the Fed should it decide to move. Its preferred measure of inflation, PCE core, has fallen sharply this year. Average earnings have certainly increased over the past couple of years, but they have fallen back in recent months, and are running below pre-crisis levels. The Employment Cost Index, which is a broader measure of the cost of employment for firms, has followed a similar trend. This suggests that there is still meaningful slack in the economy

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US: Federal Reserve FOMC "Dot Plot" (June vs March 2019 meetings; Federal Reserve)

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US: Core PCE Inflation (year-on-year percent change, Bureau of

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thanks to a growing participation rate.

ECB weighs stimulus as Draghi prepares to exit

The ECB too has turned more dovish. In June, the ECB President, Mario Draghi, noted that “lingering risks” to the Eurozone have strengthened the case for additional monetary stimulus. He said the commitment to keeping interest rates low could be bolstered and that further cuts remain “part of our tools”. Renewed asset purchases were also an option for the ECB even if that meant raising self-imposed limits on how much it can buy. Mr Draghi’s comments merely helped to accelerate the slump in German 10 year bond yields, which touched a fresh low of -0.3 percent in late June (global negative-yielding debt now exceeds $13tn).

Risks—from an enhanced trade war to a no-deal Brexit—are not so much “lingering” as mounting. Mr Draghi is due to be replaced in October, and it might seem unfair for him to saddle his successor with extra stimulus as a “parting gift”. But inflation expectations are falling again in the Eurozone, and the last thing the ECB needs is a strengthening euro. If the Fed is adding stimulus, the ECB will probably need to cut rates and at least talk about making additional asset purchases if it wants to stop the currency from appreciating.

Financial markets react cautiously to central banks’ pronouncements

Financial markets’ reaction to these dovish pivots was measured rather than euphoric. The S&P 500 did indeed rise, but gains were modest. The probability of rate cuts had already been priced in, if the yield on the Ten Year Treasury is any guide, and the S&P index appears frothy with a current p/e pushing 20. Corporate earnings growth was a pallid 1.2 percent in the first quarter, and it is not clear that even aggressive Fed rate cuts are going to revive investment given that firms are more worried about trade wars than the cost of capital. The USD index dipped, but again not by as much as one might expect given the Fed’s change in language. Investors remain edgy, and safe haven flows to USD assets are likely to at least put a floor under dollar weakness for the rest of the year, and may even see the greenback strengthen.

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Eurozone: Germany 10 Year Bund (percent, yield-to-maturity; Bloomberg)

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Oil markets

Oil markets weigh demand outlook even as Iran-US tensions flare

A stronger dollar would further sap demand for oil, all else being equal. And it is demand which is pre-occupying markets at the moment. In early July, the price of Brent was some $8/barrel below a recent peak of $74/b in mid-May, despite a ratcheting up of tensions between Iran and the US, including some physical skirmishes in and around the world’s busiest oil export channel.

East Asian oil demand looks weak across the board…

For the moment, Sino-US relations are overshadowing Iranian-US tensions. The trade war is sapping both consumer and business confidence in China, with investment growth hitting a nine-month low in May. Double-digit drops in Chinese diesel demand in March and April were partially due to declines in industrial output. Passenger car sales fell by some 16 percent year-on-year in May, and dealers report more than 3 million unsold vehicles. And it is not just China: across East Asia, big oil processors are cutting run rates in the face of falling demand. Japanese, South Korean and Indian fuel demand fell more than expected in March and April. Given Asia’s status as the engine of oil demand, it is no surprise that the International Energy Agency reported that first quarter year-on-year growth in global oil consumption was just 0.3m b/d, the weakest rise since 2011.

… but outlook could find support from a number of factors

The underlying demand situation and outlook is not uniformly gloomy, however. For a start, demand in May and (to a lesser extent) June is affected by refinery maintenance, which reduces the call on crude oil. Second, the US Fed is now poised to cut interest rates this year, which should put some downward pressure on the USD, and so boost demand for all commodities. But even if the dollar does not weaken, lower global interest rates should help give some uplift to demand in Emerging Markets. Third, demand—at least for some types of oil--could be supported by new rules around marine fuel (known as IMO 2020) that will see the majority of shippers switch to cleaner fuel next year. Quite how this might play out is far from clear, but demand for lighter, sweeter crudes—including Brent, WTI and Saudi Arabia’s Arab Light—should rise at the expense of heavier crudes.

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Oil: Change in Demand(m b/d, y-o-y; International Energy Agency)

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OPEC Plus extends production cuts for nine months

Against this backdrop OPEC agreed to extend its production cuts by 9 months during its early-July Vienna meeting. The rollover of OPEC Plus cuts is necessary because other countries are ramping up production even as Venezuelan and Iranian oil supply plummets. OPEC’s second largest producer is now Iraq, which—given its pressing infrastructure needs—is effectively not part of the production cuts. Indeed, its output continues to rise, reaching 4.7m b/d in May, some 200,000 b/d higher than a year ago. Meanwhile, Libya has confounded its chronic security problems to boost production to a six-year high of 1.25m b/d in May. Output is likely to remain volatile, but the trend since mid-2016 has been upwards. Brazil, too, is poised for significant growth this year as its technically-challenging offshore production finally ramps up. Brazil has disappointed in the past, but this year it is set to post the second-largest non-OPEC increase, behind only the US. Brazil produced 2.75m b/d in the first quarter, putting it on a par with Kuwait.

US shale output set to gather pace…

Finally, US shale oil production growth has picked up after a soft patch at the beginning of the year, with year-to-date growth of 390,000 b/d in May. The Energy Information Administration expects total US crude output to rise by 1.5m b/d this year, and by a further 930,000 b/d in 2020. The trend of supermajors increasingly dominating the shale space is set to increase this year, with firms such as Chevron and ExxonMobil spending some 16 percent more this year than last, according to one survey. The growing influence of supermajors should make shale output more stable and—as technology is deployed—more robust. Overall, the IEA sees non-OPEC supply increasing by 2.3m b/d next year, up. This non-OPEC supply alone is more than enough to match the IEA’s forecast for 2020 demand, which is 1.4m b/d.

…meaning that OPEC Plus cuts might need to be deepened

This suggests that the OPEC Plus group will need to extend their cuts for the entirety of 2020. Not only that, but if the IEA’s demand forecast is correct, then the cuts might need to be deepened. This is problematic: it would be Saudi Arabia that would likely shoulder much of the burden, and a further cut to oil output would have negative implications for the Kingdom’s overall GDP, affecting various financial ratios (and would of course mean further losses in market share). Yet if the demand picture does not at least stabilise in the second half of this year, then deeper cuts might become unavoidable.

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Oil: OPEC Total Production ('000 b/d; Bloomberg)

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Oil: Iraq and Libya Production ('000 b/d; Bloomberg)

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Oil: US Shale Production ('000 b/d; Rystad Energy)

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For the moment, we are still anticipating a slight upturn in Brent next year, though we have nudged down our forecast to $66/b (we are holding with our 2019 forecast of $65/b). Our price forecast is based on the assumption that OPEC Plus does eventually extend its cuts for the whole of 2020, and that monetary and fiscal stimulus (albeit limited) helps to stabilise demand in China. It also implies some help to light crude prices from IMO 2020 regulations. In addition, our price outlook depends on no meaningful or sustained strengthening in the US dollar. Given this many conditions, it should be apparent that we see risks as tilted firmly to the downside.

Saudi Arabia

Overall GDP growth slows, but nonoil economy perks up in Q1

Official data show Saudi Arabia’s economy expanded by 1.7 percent in the first quarter (constant prices, year-on-year), down from 3.6 percent in the last quarter of 2018. The slowdown was largely a result of reduced oil production; the nonoil economy expanded by 2.1 percent, up from 1.8 percent in Q4-18. The acceleration of nonoil output was fairly broad-based. The only nonoil sector to show a year-on-year decline was petrochemicals. The main nonoil engines—government services, finance, wholesale & retail trade—all posted gains. The growth in finance was powered by a 4.8 percent gain in real estate activities: a number of banks are now ramping up their mortgage lending as more housing comes on line, loan-to-value ratios are raised, and the legal environment is further improved. Trade has had to adjust to the expatriate exodus, which has hit both supply and demand, but it appears to be finding some equilibrium, posting its third successive year-on-year gain.

Construction sector expands for first time in years

The construction sector’s importance to the nonoil economy has been eroded by the oil price correction and the years of straitened public investment that followed. Like trade, construction has had to adjust to strict limits on non-Saudi workers, which has been particularly challenging given its reliance on cheap imported manual labour.

Saudi Arabia: Economic Indicators 2017 2018 2019f 2020f 2021f 2022f 2023f

Real GDP (% change) -0.7 2.2 0.8 1.9 3.1 3.6 3.8Real nonoil GDP (% change) 1.2 1.6 2.6 3.3 4.3 4.8 5.1CP Inflation (average %) -0.8 2.5 -1.1 2.3 2.4 2.5 2.7Fiscal balance (% GDP) -9.1 -4.7 -6.6 -6.8 -6.1 -4.3 -2.6Current account (% GDP) 2.1 10.7 7.0 6.8 8.9 9.5 9.1Net Foreign Assets (% GDP) 71 63 71 71 74 81 87Bank deposits (% change) 9.5 2.8 4.0 5.0 7.0 9.0 9.0Private sector credit (% change) -0.7 2.9 7.6 11.0 13.0 14.0 16.0Sources: national authorities, IMF, Samba

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Saudi Arabia: GDP (constant 2010 prices; y-o-y percent change;

GASTAT)

Total Non-oil

There is growing evidence that higher government spending is finally filtering through to economic activity. The growth of real public sector wages has helped to offset the impact of disappearing expatriates, and even the hard-pressed construction sector is showing signs of revival

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However, in the first quarter this beleaguered sector posted its first year-on-year gain since 2015, reflecting the revival of public investment (government capital spending grew by 12 percent year-on-year in the first quarter according to fiscal data). The sector remains vulnerable: capital spending is usually the first item to be cut if oil prices fall. Yet with local cement prices low (albeit rising again) and considerable political capital behind a number of large public projects, contractors may well feel that the worst is now behind them.

Given the pickup in nonoil growth, positive subsequent data (see below), and the prospect of interest rate cuts this year, we have raised our 2019 nonoil GDP growth forecast to 2.6 percent, from 2.2 percent earlier.

Saudi unemployment edges down, but data are inconclusive

First quarter employment data show unemployment among Saudi nationals falling to 12.5 percent, from 12.7 percent in Q4-18 and 12.9 percent a year earlier. No nominal figures for either the number of unemployed or the labour force were provided so it is difficult to draw many firm conclusions from the data. Net Saudi employment increased by just 1,000 people in the first quarter compared with Q4 (female employment grew by 6,000; male employment fell by 5,000). This suggests that the main reason for the fall in the unemployment rate was an increase in the employment of military & security personnel, and/or self-employed Saudis, given that neither group is captured in the data (the decline was not a result of a shrinking Saudi labour force since the Saudi economic participation ratio increased).

“Regular” expatriates continue to leave workforce, but there is a spike in domestic workers

The other notable development was a 224,000 increase in non-Saudi employment, which reversed the trend of a diminishing expatriate workforce that has been in place for some time now. However, the main reason for this was a 409,000 gain in domestic employment (most notably drivers, demand for whom has increased again as more Saudi women enter the labour force). Such individuals are not counted as part of the “regular” labour force. If domestic workers are excluded then some 185,000 regular expatriate workers disappeared.

Data show divergence in public and private sector pay

The fact that Saudi workers did not fill the gap left by the expatriates is largely explained by two factors. First, there is a

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Saudi Arabia: Nonoil GDP by Sector (constant 2010 prices, y-o-y percent change; GASTAT)

Construction Trade Petrochemicals TOTAL

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Saudi Arabia: Employment Trends (quarterly change in employment, '000s, includes non-

Saudi domestic workers; GASTAT)

Non-Saudi employment Saudi employment

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Saudi Arabia: Nationals' Unemployment Rate (percent; General Authority for Statistics)

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mismatch in skills: most of the departing expatriates were unskilled or semi-skilled, whereas the biggest group of unemployed Saudis (54 percent) have university degrees (typically in the humanities or teaching). Second, the wage gap between the public and private sectors remains significant. Government data show that while average wages for Saudi nationals rose by just over 4 percent between Q1-17 and Q1-19, there were diverging trends between public and private remuneration. Government wages for Saudi nationals increased by a nominal 10.3 percent over the period; Saudi private sector wages fell by 6.6 percent.

This illuminates two important themes. First, the government’s public sector wage bill is continuing to rise. From a political perspective this is understandable, but it does cut against the grain of the Vision 2030 project, which seeks to reduce the size and role of the state. That said, the IMF—among others—has encouraged the authorities to slow the pace of structural reform to allow the economy time to adjust. Second, private sector wages are not only less attractive than public sector wages, that gap is getting bigger: the average public sector wage was some 37 percent higher than in the private sector in Q1-17; by Q1-19 that gap had grown to 63 percent. It is therefore no surprise that Saudi national private sector employment fell by 32,000 between Q2-18 and Q1-19 (the data do not go back further than that).

The fact that the private sector data do not include the self-employed—or indeed those who are not registered with official social insurance schemes—are important exclusions since these are likely to be sizeable cohorts. But at the very least, the data show that a large segment of the private sector is losing its allure for Saudi workers.

Saudi public sector real wages rise briskly…

Meanwhile, Saudis employed in the public sector have enjoyed solid nominal pay increases and deflation, which has boosted real wages. Consumer prices edged up in May for the first time since July last year, but year-on-year deflation is still very much in place, with prices down 1.5 percent compared with a year earlier. The main caveat here is that the collapse of expatriate rents has dragged down the index (overall rents were down 8.5 percent year-on-year) and this price adjustment clearly has no bearing on Saudi households’ disposable income. Yet it is also the case that price pressures remain subdued—or are declining—in most categories. Based on the overall CPI, Saudi public sector wages have grown by 6 percent in real terms in the past four quarters.

17321719

1703 1700

1500

1550

1600

1650

1700

1750

Q2-18 Q3-18 Q4-18 Q1-19

Saudi Arabia: Total Saudi Nationals Employed in Private Sector

('000s; GASTAT)

5000

6000

7000

8000

9000

10000

11000

12000

Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19

Saudi Arabia: Wages for Saudi Nationals (SR, avg., monthly; GASTAT)

Public Private

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19

Saudi Arabia: Public Sector Real Wages(Saudi nationals, quarter-on-quarter percent

change; GASTAT)

inflation real wages

July 2019

PUBLIC

10

…helping to buoy domestic demand

This now appears to be having a material impact on domestic demand. The moderate acceleration in GDP in the first quarter has since gathered pace according to higher-frequency data. Points of sale transactions, which are a proxy for retail sales, continue to expand at a near-50 percent year-on-year pace in volume terms, and around 20 percent in value terms. In fact, the value growth rate has closed the gap with volume slightly, meaning that value-per-transaction ticked up in May.

Imports of construction inputs and consumer goods spike up

The revival in the construction sector was further demonstrated by a spike in private sector imports of building materials (new LCs)—up by a whopping 41 percent year-on-year in May. The data might be distorted by Ramadan (the timing of which shifts by around 3 weeks each year) but on a rolling three-month basis the uplift was still an impressive 30 percent. Imports of key consumer goods, such as cars and appliances, have also posted brisk growth. Car dealers have had a tough few years, and have struggled to shift inventory (even of models just a year old), so it was encouraging to see passenger car imports averaging 60 percent year-on-year growth in the March-May period. Demand for appliances posted a similar bounce, supported by the lively housing market.

Further positives can be found in the PMI for June, which depicts business conditions in some 400 Saudi private sector firms. The headline reading climbed to an18-month high of 57.4—the seventh rise in the past nine months. Respondents reported stronger underlying demand conditions and a steep increase in new business.

Balance of payments strengthens in Q1

Saudi Arabia’s balance-of-payments position improved markedly in the first quarter, allowing a $3bn accumulation of reserve assets. Though the gain was not especially large, the swing from a $10.6bn drawdown in the final quarter of 2018 was sizeable. The current account returned an $11.5bn surplus (up 25 percent year-on-year, though down quarter-on-quarter). The trade surplus was essentially unchanged: weaker oil prices in Q1-19 versus a year earlier were offset by gains in oil production. Import spending was up, but not dramatically. The current account was also helped by the slide in workers’ remittances outflows, which were down by around $1bn compared with Q1-18.

0

50

100

150

200

250

300

350

400

Au

g-1

6

Oct

-16

De

c-1

6

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

De

c-1

7

Feb

-18

Ap

r-1

8

Jun

-18

Au

g-1

8

Oct

-18

De

c-1

8

Feb

-19

Ap

r-1

9

Saudi Arabia: Points of Sale Value per Transaction (SR; SAMA)

-30

-20

-10

0

10

20

30

40

Saudi Arabia: Private Sector Imports of Building Materials

(new letters of credit, value, y-o-y, 3 mo rolling avg; SAMA)

-100

-50

0

50

100

150

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

May

-18

Jul-

18

Sep

-18

No

v-1

8

Jan

-19

Mar

-19

May

-19

Saudi Arabia: Private Sector Imports of Cars and Appliances

(new LCs, value, y-o-y, 3 mo rolling avg; SAMA)

cars appliances

30

35

40

45

50

55

60

65

70

Saudi Arabia: Purchasing Managers Index (above 50 denotes accelerating rate of growth;

Markit, Emirates NBD)

July 2019

PUBLIC

11

Private outflows on financial account have slowed…

The most welcome development was on the financial account (from which we exclude reserve assets). This recorded a much-reduced deficit of $8bn in Q1, down from a hefty $27bn in Q4. This is partly a function of the somewhat smaller current-account surplus (compared with the 4th quarter) which left less money to invest overseas. But the shape of the financial account is also changing. In 2017 and 2018 the financial account was marked by substantial gross private outflows and lacklustre gross foreign inflows. In the first quarter of this year there were still sizeable outflows, but much of these were captured either as foreign direct investment or debt and equity acquisitions, which suggests that they were made by state-owned firms such as the Public Investment Fund. The opaque “currency and deposits” outflows, which were a big feature of 2017 and 2018 (averaging $11.7bn) fell to less than $5bn in Q1-19. Sizeable private outflows are worrying on two levels: first they can put pressure on official forex reserves, and second they might indicate domestic private dissatisfaction with the local investment environment. Their reduction is therefore welcome.

…and foreign inflows have picked up

Just as encouragingly, foreign inflows picked up. FDI grew to $1.2bn, a modest increase from an average $800m in 2018, but certainly grounds for optimism. FDI is seen by many as the key to the Vision 2030 project given its importance in providing Jobs, technology and marketing know-how. Portfolio inflows surged to $11bn, from just $2.1bn in Q1-18, reflecting investor positioning in the Tadawul prior to its inclusion in various Emerging Market stock indices this year (further large inflows should show up in Q-2 data given increased equity positioning and the Saudi Aramco bond issue).

Overall, the first quarter data suggest that the financial account has “turned the corner”. Growing investment opportunities in the Kingdom appear to be keeping more private capital at home and luring more foreign capital in.

-40

-30

-20

-10

0

10

20

30

Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19

Current Account and Financial Account($bn; SAMA)

financial account current account

-9,466

-24,289

-9,305

-14,108

-8,130 -8,827-10,151

-15,931

-6,311-4,977

-30,000

-25,000

-20,000

-15,000

-10,000

-5,000

0

Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19

Saudi Arabia: Financial Account: "Other Investment" Net Outflows

($m; Sama)

2.01

0.34

0.55

0.27 0.26

0.840.74 0.78 0.83

1.25

Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19

Saudi Arabia: Financial Account FDI Inflows ($bn; SAMA)

July 2019

PUBLIC

12

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