The seasonally-adjusted Riyad Bank Saudi Arabia Purchasing Managers’ Index fell to 56.4 in May 2024, from 57.0 in April, and was the second lowest reading in 22 months, higher only than January’s low. A reading above 50 marks indicates an expansion in activity.

Growth in sales was also the least marked in just over two years. Demand expanded at a slower pace as some companies reported a slowing of market conditions and difficulties gaining new customers due to high competition.

However, the surge in demand has also led to price pressures impacting input prices and staff costs, although the increase in output prices has been observed at a slower pace, said Naif Al-Ghaith, Riyad Bank’s chief economist.

“This balancing act reflects the challenges faced by businesses in managing costs while trying to capitalise on the expanding market,” Al-Ghaith said, as reported by Zawya.

Inventory growth continued after reaching its highest on record in April 2024. However, higher stock levels led to some pullback on purchasing growth which slipped to the weakest since September 2021.

The slowdown also coincided with a drop in business confidence towards the 12-month activity outlook, bringing sentiment to its lowest level since January 2024.

“Employment levels increased in May 2024, offsetting the first decline in over two years in April. Staffing growth was mostly linked to higher workloads and efforts to reduce outstanding orders, which duly fell slightly,” the report said.

“Cost pressures eased from the beginning of the year despite a solid increase in supplier prices and a much quicker rise in employee wages,” the Riyad Bank study noted. However, selling prices rose only marginally as firms reacted to growing competitive pressures.

Talking about the Kingdom’s non-oil sector, the revenues generated from it hit 50% of the Kingdom’s GDP in 2023, the highest level ever. The non-oil economy was valued at 1.7 trillion Saudi Riyals (approximately USD 453 billion) at constant prices, driven by steady growth in exports, investment and consumer spending.

In 2023, as per the data available with the Saudi Arabia Ministry of Economy and Planning, the Kingdom’s private-sector investments expanded by a brisk 57%, reaching a record high of 959 billion Saudi Riyals (USD 254 billion) while arts and entertainment, along with real service exports grew in triple-digits to the tune of 106% and 319%, respectively.

The food sector also recorded 77% growth; transport and storage services grew 29%, health and education recorded growth of 10.8%, trade, restaurants and hotels at 7% while transport and communications increased 3.7%.

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The largest earnings for the world’s top energy exporter since its public listing three years ago, signifying a gain of 90% year over year.

The invasion of Ukraine by Russia has caused gas and oil prices to surge.

Russia is one of the major exporters in the world, but Western countries have vowed to minimize their reliance on it for their energy needs.

Bloomberg claims that the amount from the Saudi oil firm Aramco is “the biggest quarterly adjusted profit of any listed company.”

Along with reporting record profits, the state-owned Saudi energy behemoth also disclosed that it would maintain its third-quarter dividend at $18.8 billion.

Aramco declared that it would keep growing to meet demand.

Aramco president and chief executive Amin Nasser said, “While global market volatility and economic uncertainty remain, events during the first half of this year support our view that ongoing investment in our industry is essential both to help ensure markets remain well supplied and to facilitate an orderly energy transition.”

“In fact, we expect oil demand to continue to grow for the rest of the decade, despite downward economic pressures on short-term global forecasts,” Amin Nasser added.

Before the Ukraine conflict, oil prices were already on the rise as demand surpassed supply and economies began to recover from the COVID-19 pandemic.

ExxonMobil, Chevron, and BP, three of the largest oil producers in the world, all reported huge earnings this year, which has increased calls for governments to enact a windfall tax in response to an alarming spike in living expenses.

US President Joe Biden claimed in June that Exxon had “more money than God this year.”

In OPEC, a grouping of the major oil producers in the world, Saudi is the greatest individual producer.

In an effort to lower the high price of oil, OPEC+ opted to significantly increase production last week. The most recent production output growth, nevertheless, is happening considerably more slowly than in recent months.

Leaders who had asked for more production, like Mr. Joe Biden, were disappointed by the decision.

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Known as the largest economy in the Arab World, Saudi Arabia is now expected to grow 2.1 percent in 2021 after showing a decline of 4.1 percent in 2020, where the market was severely affected by the coronavirus pandemic and lower oil prices, reported IMF.

The non-oil sector of Saudi Arabia showed an upwards steep for the first time since the first quarter of 2020, while the government sector also showed a growth of 0.3 percent in the first quarter.

The latest data also mentioned that Saudi Arabia is trying to boost its non-oil sector through a multi-trillion dollar deal that will require state companies to reduce the dividends that they pay the government in order to boost capital spending, Crown Prince Mohammed Bin Salman said in a statement.

Prince Mohammed, who is the architect of Saudi Vision aims to correct the oil disparity by 2025 with the help of the Public Investment Fund that will invest a whopping amount of SR150 billion into the local economy.

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In an official statement, the state-owned body said that Saudi oil exports amounted to $19.9 billion during the second quarter of 2020.

The Kingdom, which is the largest exporter of crude oil, has been seeing its demand declining since the start of the coronavirus pandemic.

Saudi Arabia has also reduced its oil price for the US and its Asian customers in October, media report said.

State-owned oil giant Saudi Aramco is reducing pricing to Asia for October shipments of the Light grade by $1.40 a barrel, to 50 cents below the regional benchmark, according to media reports.

Oil exports from the Kingdom to the US hit the lowest in more than three decades by August this year, down to an average daily of 177,000 barrel per day (bpd) from some 1.3 million bpd in April.

Earlier this year, Saudi Arabia led OPEC and its members also started a crude oil price war with Russia which also plummeted the global price for crude to a record low.

However, Saudi Arabia and Russia decided to slash output a month later and bring an end to the oil price war. OPEC and its allies decided to slash oil output by about 10 million barrels a day in May and June.

Representatives of each country met through a video conference to make the decision, which was called for by US President Donald Trump. Due to the oil price war, the US shale companies were also severely hit.

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In 1952, the Saudi Arabian Monetary Authority was established by two royal decrees and continues to monitor the banking industry to date. Following the establishment of the regulator, it licenced a significant number of local and foreign institutions which introduced new products and services to both retail and commercial customers in the Kingdom. That has led to the creation of today’s key players including the National Commercial Bank and Riyad Bank.

Cut to recent times, the Kingdom’s banking industry demonstrated strong financial performance compounded with promising profit growth in 2019. The total assets of the Kingdom’s five largest banks increased by 16 percent to reach $453.2 billion. The banks’ combined loans and advances expanded by 15 percent to $266.6 billion, with an impressive 30 percent growth in profits totalling to $9.1 billion from $7 billion in 2018.

Saudi banks see a new wave of mergers and acquisitions
Another notable event which took place last year was the merger of Alawwal Bank and the Saudi British Bank leading to a structural change in the industry. Also, the Saudi Arabian Monetary Authority granted two new banking licences to Credit Suisse and Standard Chartered Bank. Despite the pandemic, it appears that there is room for new establishment of banks in the Kingdom. For example, the National Commercial Bank which is the Kingdom’s largest bank by assets is likely to acquire rival Samba Financial Group. Under the terms of the proposed deal, the National Commercial Bank has offered to pay $15.6 billion to Samba Financial Group at a premium of 27.5 percent to the latter’s share price. It is anticipated that the consolidation will create the third largest lending in the region with total assets of approximately $210 billion, put behind Qatar National Bank and First Abu Dhabi Bank.

In this context, Christos Theofilou, a senior analyst at Moody’s, told the media, “NCB would benefit from Samba’s strong corporate and investment banking franchise and well-established risk management practices. The merger would combine NCB’s large franchise across most business lines and mass retail capabilities with Samba’s upper-middle-income retail presence and well-established corporate banking franchise.”

Even prior to the pandemic, the Kingdom and the wider GCC were on the brink of a new wave of mergers and acquisitions to boost competitiveness, reduce operating costs and increase capital amid slow economic growth. The Saudi Arabian Monetary Authority is also processing additional applications for two traditional and one digital banking licences. In fact, the regulator has accelerated the application process for banking licences — making the Kingdom an attractive hub for banks seeking to foray into the domestic market in the future.

Are Saudi banks equipped for the pandemic’s distress?
Truth be told, the Kingdom’s banking industry started this year on a promising note, with 13 local banks offering services to a population of more than 30 million people. But as experts have emphasised the long-standing effects of the pandemic on the industry, the scale of the impact could be significant on its asset growth through this year. This is despite the fact that the Kingdom’s banks have strong capabilities to remain profitable over looming difficulties — as was the case in the past.

For example, the Saudi Arabian Monetary Authority experienced its first complexity in the 1960s when a number of non-performing loans established by Al Watany Bank led to the collapse of a major financial institution. This in turn had a residual effect on the regulatory framework governing the banking industry.

The Saudi Arabia Monetary Authority has provided support for domestic banks by rolling out a myriad of measures in response to the pandemic. These measures include funding to help companies maintain employment levels, support banks customers who have lost jobs, restructure loans without additional fees, waive off charges for accounts holding below minimum balances, refunds for customers on currency exchange fees during travel plans.

In March, the Saudi Arabia Monetary Authority introduced the Private Sector Financing Support Programme to strengthen financial stability and support the government’s efforts to protect businesses worst affected by the pandemic. The programme seeks to allocate $13.3 billion in loan guarantees for the sake of deferred payments and direct funding for lending.
The long-standing impact of the pandemic
But in the midst of a protracted pandemic causing global recession — what is the impact on the domestic banking industry? Is the industry prepared to fight the downside effects of the pandemic? Will the pandemic undermine the industry’s asset growth?

It is certain that declining oil prices and Covid-19 pandemic in early 2020 is posing great challenges for the global banking industry. In this context, Ovais Shahab, Head of Financial Services, at KPMG Saudi Arabia, told International Finance, “In 2020, the majority of banks across the world will inevitably face challenges, and the Saudi banking sector is no exception. However, the resilience and strength of the Saudi banking system will allow it to cushion the economic fallouts of Covid-19.”

S&P Global Ratings in a report titled Saudi Banking Sector 2020 Outlook: Risks Contained Despite Higher Credit Growth noted that the profitability of the Kingdom’s banks could lower slightly on the back of softening monetary policy and rates decline. That said, in another report titled Banks In Emerging Markets: 15 Countries, Three Main Risks,

the ratings firm expects the credit losses to stabilise with the help of steadying economy and mortgage-led lending growth. In fact, S&P has praised the Saudi Arabian Monetary Authority for keeping a good track record. Last September, the long-term rating on banks stood at BBB+ in line with a stable outlook.

Now the domestic banks seek to expand beyond competitive corporate and retail segments in the long term — extending their services to underserved market segments such as smaller enterprises and microfinance. In the first quarter of 2020, the Kingdom’s banking industry saw 13 locally licenced banks, of which, five of them held total assets worth more than $53.2 billion.

Banking performance in 2020 — an overview
In March, the central bank foreign exchange reservesdropped at its fastest rate in at least 20 years — and the Kingdom’s budget deficit dropped to $9 billion in the first quarter as oil revenues crashed.

“With the dissemination of financial results for the first quarter of financial year 2020, the magnitude of the pandemic impact on the banking industry has unfolded. The banking sector has reported an average increase of 93.3 percent in expected credit losses for the first three-month period and significant declines in market valuations since December 2019,” Shahab explained. “Nonetheless, healthy credit underwriting until February 2020 enabled total assets to rise 3.9 percent to SAR 2,540 billion ($677 billion), while total customer deposit edged up 1.5 percent to reach ($489 billion). Total gross loan book also posted an average growth of 4.9 percent. Despite the hike in expected credit losses, a substantial amount of income in the form of a SAR 1.12 billion government grant resulting from Saudi Arabian Monetary Authority support measures which have restricted the decline in net profitability only to 6.9 percent, relative to the same period of financial year 2019.”

The consequences of the pandemic for the banking industry in the Kingdom and globally is still unclear. But the consensus among economists is that there will be a slowdown in activities and a downward revision in GDP growth targets for 2020. For that reason, most governments have outlined inducement measures to sustain the economy and protect the core of the banking system in the long term.

SAMA issues measures to preserve the core banking system
A report published by KPMG said that the Saudi Arabian Monetary Authority has issued a myriad of measures and guidelines for banks and financial institutions in the Kingdom to cope with the pandemic’s distress. For example, it has introduced a Private Sector Financing Support Programme with a total value of SAR 50 billion.

In theory, the regulator has introduced key financial support programmes and qualitative measures through commercial banks. The support programmes comprise allocation of a SAR 30 billion stimulus package for banks and financing companies to delay SME dues for six months of its date, provide concessional finance of nearly SAR 13.2 billion for SMEs by granting loans from banks, allocation of SAR 6 billion for MSME sector to facilitate secure financing for banks under the Kafalah SME Loan Guarantee Programme and support the ecommerce sector by bearing the costs for point of sales and ecommerce services.

That said, the qualitative measures include extending working capital finance to all corporates to meet short-term liquidity requirements, flexibility in repayments of consumer finance to individuals who have lost their jobs due to the pandemic, waiver of all fees in the use of digital banking, waiver of minimum deposit balance requirement for up to six months and review credit card interest rates adjusting them to reasonable APR rate.

The regulator has been quite responsive to the current situation and has injected $13.3 billion into the banking industry as they prepare to resume operations. Shahab said, “The stimulus package has aimed to enhance the liquidity, as well as enable banks to continue providing credit facilities to their clients. The central bank’s decision to inject such a large amount of cash into the banking sector in the form of a one-year free deposit is rooted in its role of promoting financial stability. It will further help the wider banking sector to continue to provide credit to borrowers during this challenging period.”

The amount was injected in an effort to ensure the banking industry is able to continue lending to private firms on the back of slow economic recovery. The regulator said in a statement that the banking industry remains strong with assets up 14 percent in the first quarter of 2020 compared to the previous year.

It appears that banks are relatively high on liquidity compared to the pre-Covid-19 period, observed the KPMG report. Shahab further explained that “The Saudi Arabian Monetary Authority has always made sure there is enough liquidity in the monetary system in general and in the banking sector in particular. Such support is part of several financial stimulus programmes spearheaded by Saudi Arabian Monetary Authority since the start of Covid-19 outbreak Its ongoing support to banks through liquidity and relief, amplified by recently announced measures, has been the key mitigant to combat the impact on the banking industry.

“A robust support programme by the apex bank suggested that panic-driven measures such as foreclosures, uneconomical debt restructurings and forced liquidations have not been rampant. These measures have been a breath of fresh air not just for the corporates, primarily the micro, small and medium enterprises (MSME) sector, in addition to banks as they combat the economic fallout on the front lines.”

Finance Minister Minister Mohammed Al Jadaan said that the Kingdom must reduce expenditures to mitigate the negative economic effects of the pandemic. “Saudi Arabia is committed to protecting itself from the economic fallout of the Covid-19 pandemic through any necessary financial measures despite plunging oil revenues,” the Finance Minister told the media. The Saudi Arabian Monetary Authority confirmed that the Kingdom’s foreign assets have dropped to $464 billion — marking its lowest record in 19 years as it combats economic fallout.

KPMG’s ‘cautious optimistic’ outlook explained
Against this background, KPMG conducted a survey on C-suite executives to fully understand the severity and duration of the pandemic’s impact and the banks’ preparedness to strategies undertaken by the regulator and the government. The first point emphasises 10 percent to 20 percent of the loan book for more than half of the banks need to undergo restructuring changes. The second point highlights that SME financing is the most impacted followed by consumer and corporate banking. The third point notes that banks consider Saudi Arabian Monetary Authority’s plans to be highly comprehensive and sufficiently focused on all business segments.

The KPMG report also pronounced the fact that it is important for banks in the Kingdom to assess whether the credit risk on a financial instrument has increased since initial recognition. However, the rising challenge for the banks is to incorporate predictions associated with the economic impact of the pandemic. In fact, the report has expressed ‘cautious optimism’ for the domestic banking industry.

“The financial trends identified by KPMG’s analysis for 2019 were mostly positive, and particularly impressive, given the unique political and economic circumstances the region has witnessed in recent years, reflecting the continued resilience of the Kingdom’s banking sector. Saudi Arabia’s 11 listed banks reported an asset growth of 12 percent to $652 billion during the fiscal year 2019, with a healthy 40.9 percent growth to $12.03 billion in net profit. Our evaluation of the key financial indicators for the past year suggests growth and a positive outlook for the banking environment in the Kingdom, fueled by a proactive government and bespoke initiatives by the regulators,” Shahab said. “However, banks that are agile, flexible and willing to transform their business models will succeed, and secure their financial strength for future growth, while those that rest on their laurels will be left behind. Of late, the Covid-19 situation has not only tested the strong capitalisation and high profitability of the sector but indicating a dynamic shift in investment towards digital platforms and omnichannel functionalities. Looking forward, KPMG’s key predictions for 2020 include continued customer focus through innovation, cost and operational efficiencies to remain a priority, limited asset and profit growth, increasing capital and fundraising activity, further consolidation and rethinking of business models.”

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The decision is based on  reduced oil demand globally. According to the decision, 9.7 million barrels per day will be slashed. This is effective May 1 2020 for a period of two months, media report said.

The rate of oil production will is expected to slowly improve during the period between July and December 2020. It is reported that the oil production cut will narrow by 3.6 million barrels per day.

This means that the Kingdom’s oil production would initially decline 8.5 million barrels a day in the first half and to 9 million barrels per day in the second half of the year.

The US President Donald Trump tweeted “Having been involved in the negotiations, to put it mildly, the number that OPEC+ is looking to cut is 20 million barrels a day, not the 10 Million that is generally being reported. If anything near this happens, and the World gets back to business from the Covid 19 disaster, the Energy Industry will be strong again, far faster than currently anticipated. Thank you to all of those who worked with me on getting this very big business back on track, in particular Russia and Saudi Arabia.”

The cut in oil production is anticipated to stabilise the oil market globally after the pandemic settles.

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Saudi Arabia  is concerned that the coronavirus epidemic could lead to a decrease in oil consumption, media reports said. The Opec+ oil cut discussion is taking place in Vienna this week. In fact, Saudi Arabia has pushed for a larger oil cut compared to the suggestion made by the Goldman Sachs’ technical committee. 

It is reported that the panel has recommended 600,000 to 1 million barrels per day reduction in the second quarter of the year. Goldman Sachs was the first Wall Street Bank to predict a shrink in oil demand this year. 

The Opec+ was formed four years ago. Jim Burkhard, vice president and head of oil markets at IHS Markit, said, “This is a sudden, instant demand shock. The scale of the decline is unprecedented.”

More recently, Morgan Stanley updated its oil demand forecast in China for 2020. According to the forecast, it expects a near-zero demand on the mainland. 

The Environmental Impact Assessment (EIA) was also skeptical of revising its oil demand outlook by 378,000 bpd. EIA said that the growth in oil demand could drop by 190,000 bpd because of the epidemic. 

The EIA, Morgan Stanley and IEA have revised their forecast for growth in oil demand, with IEA’s outlook being the most pessimistic. 

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Its renewable energy strategy is in line with the Vision 2030 framework. The strategy will have an energy mix which is crucial for the Kingdom’s long-term economic prosperity. 

According to Prince Abdulaziz bin Salman Al Saud, Saudi Arabia’s Minister of Energy, “The best energy power mix for Saudi Arabia is gas and renewables. By 2030 we will be developing our gas resources. We will be quite big in terms of renewable use. The more we use renewables and gas for our consumption, the more we will be freeing liquids which are exportable to the world market.” 

Last December, the Kingdom was expecting to generate investments worth $3.7 billion in the second and third rounds of the National Renewable Energy Programme, the media reports said. 

The renewable energy investments are expected to create 6,800 construction job opportunities and 730 jobs in the operation and maintenance phase. The National Renewable Energy Programme is designed to monitor the domestic power mix. 

Round two of the National Renewable Energy Programme currently has six photovoltaic solar independent power projects, with a combined capacity of 1,270MW. Likewise, one wind project and five solar projects with a combined total capacity of 1,580MW are under round three. 

Prince Abdulaziz emphasised that it is important for the Kingdom to become a significant consumer of renewable energy. To that end, a price reform programme is necessary, he said. 

The Kingdom’s renewable energy targets involve improvement aimed at buildings, vehicles, utilities and manufacturers. 

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The joint venture Jasara Program Management was established in 2017 to strengthen social infrastructure programmes through its management services in the Kingdom of Saudi Arabia, the Middle East and North Africa. 

The Saudi wealth fund PIF will hold a 30 percent stake in Jasara from Aramco and 10 percent from Jacobs Engineering after the transaction is completed. With that, Aramco and Jacobs Engineering will own 20 percent and 40 percent respectively. 

The Saudi government had announced plans to modify Aramco from an oil giant into an industrial conglomerate in an effort to break the kingdom’s heavy dependence on oil sales. This was around the time Jasara was established.

A Russian media report said that Aramco is seeking a partnership with Russia’s Lukoil for two natural gas projects in Uzbekistan. Lukoil was also interested in partnering with the oil giant in international projects. Aramco is preparing for an initial public offering that was stalled in the recent past. 

Saudi wealth fund PIF has $300 million worth of estimated assets according to the Institute of International Finance. In May, PIF Managing Director Yasir al-Rumayyan said that Saudi’s wealth fund is planning to expand in China, with new offices in Asia. The fund has “deployed directly and indirectly more than $50 billion in the past two years in the US,” he said. 

PIF is planning to become a major global investor under Saudi’s Vision 2030 reform plan. By that date, it targets to control more than $2 trillion, a regional media report said.

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When the plan for the world’s biggest ever IPO was announced back in 2016, JPMorgan, Morgan Stanley, and HSBC were among the banks picked to play a leading role.

Boutique investment banks Moelis & Company and Evercore were also hired by Aramco, but as independent advisers.With Saudi Aramco’s IPO plan back on track, investments banks are lining up again to be part of the world’s biggest ever IPO.

Despite being in discussion for two years, Saudi Aramco put the IPO plans on hold last year. The company decided to buy a $69 billion stake in local chemical giant Saudi Basic Industries Corporation instead.

Saudi Arabia’s energy minister Khalid Al-Falih told Reuters, “The IPO process was never fully suspended. We have always been clear that the IPO will happen in the 2020-2021 timeframe. We have never stopped talking about the IPO.”

According to Al-Falih, Aramco’s $69.1 billion acquisition of a 70 percent stake in Saudi Basic Industries (SABIC), a petrochemicals firm, and the recent $12 billion bonds sale are the main reasons behind the delay. But now since all the issues are resolved, Saudi Aramco is ready to go ahead with the initial IPO plan.

According to Bloomberg, Saudi Crown Prince Mohammed bin Salman is also keen to list Saudi Aramco on the New York Stock Exchange.

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