Saudi Economic Outlook & Banking Beyond the Crisis

1. King Fahd University Of Petroleum & Minerals December 2010 Saudi EconomicOutlook & Banking Beyond the Crisis Said A. Al-Shaikh National Commercial Bank

2. Outline • Global Economic Update • Saudi Arabia Economic Outlook • Budgetary Developments & Fiscal Policy • Economic Growth Forecasts & Megaprojects • Inflation & Monetary Policy • Banking & Financial Markets

3. Global Economic Update

4. Global recovery evolved on a steady path in 2010; yet, economic growth will be uneven, with modest growth in developed economies (2.7%), and strong growth in emerging economies (7.1%) Sources: IMF

5. As the effect of stimulus measures wane, demonstrated by weakening PMI since April, global economy is losing momentum with growth expected to slow to 4.2% in 2011 after rising 4.8% in 2010, but a double dip is unlikely Sources: IMF and JP Morgan

6. Dollar has been weakening since 3Q, against Euro, on weak economic data in US and expectations of further QE, though medium term weak outlook in Euro area may rebalance Euro-Dollar Sources: Reuters

7. Saudi Arabia Economic Outlook

8. Budgetary Developments &Fiscal Policy

9. Crude oil prices, based on a gradual recovery in global demand, are expected to average $80 with Saudi production rising to 8.5 million b/d in 2011. Sources: EIA, OPEC and NCB

10. The Current and Fiscal account Balances are projected to register higher surpluses in 2010 and 2011, on expected higher oil revenues Sources: SMA, MOF and NCB Research

11. Despite rising expenditure beyond budget, the fiscal balance in 2010 is expected to record a surplus on higher oil revenues Sources: MOF and NCB Research

12. The government has been placing greater emphasis on capital expenditure in order to create job opportunities and support economic growth in the medium-term Sources: SAMA, MOF and NCB Research

13. The public debt has been reduced sharply, and now government expected to pay off the outstanding debt, but gradually and over an extended period of time Sources: MOF and NCB Research

14. Net Foreign assets, largely in US fixed income securities, will regain back its position of 2008, enabling the government to pursue its fiscal expansionary policy beyond 2010 Sources: SAMA and NCB Research

15. Economic Growth Forecats & Megaprojects

16. Saudi Economy is well placed to grow at pre-crisis levels, underpinned by government spending, with non-oil private sector leading the recovery Sources: SAMA, MOF and NCB Research

17. The robust government infrastructure spending will continue to lend support to the non-oil sector, mainly utilities and construction Sources: SAMA and NCB Research

18. Although expenditures in residential construction show faster growth, non-residential works still represent the bulk of investments at 72% with GFCF rising to SAR188 bn in 2010 Sources: SAMA

19. Improved business environment along with economic reforms have accelerated FDI inflows, with manufacturing accounting for the largest share followed by finance & real estate Sources: SAGIA

20. Steps taken by PIF and SIDF to provide funding for mega infrastructure and industrial projects along with ECA’s and improving appetite of local banks are easing the financing challenge

21. 728 current projects in the Kingdom exceeded SAR2.6 tr in worth, while 22% of projects are in the execution phase led by construction, infrastructure and power, respectively Sources: MEED Projects, as of June 2010

22. Contracts awarded in 2010 and 2011 are forecasted at SAR240 bn and SAR323 bn, respectively, while construction sector dominates the market, followed by petrochemical and oil & gas sectors Sources: MEED Projects, as of June 2010

23. To be continued