Dania Saadi: Saudi investors adopt a pessimistic outlook even as oil bounces

'It is going to continue for a few months or few weeks until the government announces how the private sector is going to participate in economic expansion,' said Mohammed Al Suwayed of Adeem Capital in Riyadh.

Saudi investors may have little to cheer from a market rebound, as the country’s stock exchange remains among the world’s worst performing markets so far this year.

After oil prices rallied last Friday, the Tadawul gained 2.7 per cent on Sunday and was flat on Monday – bringing its decline for 2016 to 18.8 per cent.

The immediate outlook, analysts say, remains bleak.

“It is going to continue for a few months or few weeks until the government announces how the private sector is going to participate in economic expansion,” said Mohammed Al Suwayed, the head of capital and money markets at Adeem Capital in Riyadh. “There is high ambiguity in the market right now.”

The government announced a 2016 budget that included a raft of reforms, including lower spending; unprecedented cuts in subsidies on electricity, water, gas and other energy products; and plans to privatise some assets over the next five years.

But it did not spell out how it planned to sell assets and encourage the private sector to make up for lower government spending, which is the main driver of growth.

Saudi Arabia plans to cut public spending this year to 840 billion Saudi riyals (Dh822.46bn), down from the 975bn riyals spent last year. With the economy so dependent on government spending, this reduction will slow economic growth further.

The IMF has lowered its economic growth forecast for the kingdom this year to 1.2 per cent, down from its October forecast of 2.2 per cent and the slowest pace of growth since 2002. Growth last year was 3.4 per cent.

The main reason for the dismal outlook is the plunge in oil prices on a global supply glut and weak demand. As the world’s largest oil exporter, Saudi Arabia relies on oil revenue for more than 70 per cent of government income.

“We have started to see some pressure across different sectors, which is a reflection of the more challenging backdrop – a drop in oil prices and tightening in government spending, which would result in a slowdown of the non-oil sector in Saudi Arabia,” said Rami Sidani, the head of frontier investments at the asset manager Schroders. “The removal of subsidies will put pressure on the earnings across different sectors, where the petrochemical sector will be on top of the list.”

Already, earnings of petrochemicals, oil-related companies and construction have been dismal.

Sabic, one of the world’s biggest petrochemical producers, reported a 29.4 per cent drop in fourth-quarter net profit because of lower sales prices. Sabic has said the removal of subsidies would push up total annual costs by 5 per cent before minority interest this year and the effect will start to be felt in the first quarter.

Petro Rabigh, a refining and petrochemical joint venture between Saudi Aramco and Japan’s Sumitomo Chemical, widened its losses in the fourth quarter amid a drop in prices of petrochemical and oil products. Petro Rabigh has said the financial effect from the scrapping of subsidies would be 300 million riyals this year.

The Saudi construction company Abdullah A M Al Khodari and Sons swung to a fourth-quarter net loss as revenue dropped and margins fell. The lifting of subsidies will increase costs of outstanding projects by 44.3m riyals between 2016 and 2020.

“Fourth-quarter earnings were bad, less than expected. Very few sectors reported growth,” said Iyad Ghulam, an equity analyst at NCB Capital in Riyadh. “In general, the lower earnings affected investor sentiment and the market. Going forward, the period will be challenging for companies because from the first quarter we will begin to see the effect of the removal of subsidies.”

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