Global Economy: Trends, Risks and Growth Outlook
Recent Trends
Global economic activity continued to expand in 2014 despite weaker than expected growth in the first half of the year. In the US, economic activity continued to expand at a moderate pace at the end of 2014, with real GDP growing at a subdued 2.4 percent.
Global Financial Developments and Financial Stability Risks
Emerging markets and developing economies (EMEs)1 continued to show sustained economic growth of 4.6 percent in 2014. India is growing at nearly the same rate as China, with a growth rate of 7.2 percent in 2014.
Global Growth Outlook
Capital expenditures continued to grow strongly and accounted for 34.7 percent of total expenditures incurred in 2014. These loans can be used to finance up to 50.0 percent of the total project cost.
The Saudi Economy: Trends, Risks and Growth Outlook
Growth and Inflation Trends
Monetary Developments
Fiscal Developments
Labor Market Performance and Reforms
External Performance
Pattern of Capital Flows
Risks and Saudi Growth Outlook
Banking Sector: Operating Efficiency, Risks and Resilience
Overview
The Saudi banking sector, which is the largest segment of the Saudi financial system, is well capitalized, profitable and liquid. It is because of these supportive features coupled with strong government policy responses that the Saudi banking sector has remained largely insulated from global financial market volatility over the past few years. In the wake of the global financial crisis of 2007-09, credit growth in Saudi Arabia initially slowed, but picked up in subsequent years without deterioration in banks' asset quality.
In recent years, while efforts are being made to deepen and promote the Saudi financial system.
Balance sheet assessment - Banks Assets
- Bank Credit
- Corporate Lending
- Consumer Lending
- Real Estate Lending
- Maturity Distribution of Bank Credit
Domestic bank credit constituted the largest component of banking sector assets, accounting for about 60.0 percent of total banking sector assets in 2014. Corporate loans accounted for 57.0 percent of total bank credit in 2014, followed by consumer loans (25.8 percent), credit classified as Other (14.2 percent), and loans to government and quasi-government agencies (3.7 percent ). Bank credit to the private sector, which includes both consumers and companies, amounted to SAR 1.2 trillion in 2014, representing 96.3 percent of the total.
Looking at the distribution of credit among key corporate sectors, Trade, Manufacturing and Processing, and Building and Construction accounted for more than 70.6 percent of bank credit to all companies in 2014.
Balance sheet assessment - Banks Liabilities
- Bank Deposits
- Maturity of Distribution of Banks Deposits
The private sector continued to hold the majority of bank deposits, with a share of around 75 percent in 2014, with the majority of these deposits being demand, non-interest-bearing deposits. The share of demand deposits in the total deposits of banks was 63 percent in 2014, followed by fixed and savings deposits (25.3 percent) and virtual money deposits (11.9 percent)8. While corporate and household deposits accounted for the majority of all demand deposits (94 percent) and time and savings deposits (42.5 percent), foreign currency deposits accounted for 84 percent of virtual money deposits, with government entity accounts accounting for the share. 41.4 percent in 2014. The majority of foreign currency deposits until 2008 were accounts of companies and individuals.
Short t-term deposits with a maturity date of less than 12 months represent approximately 97.0 percent of the total deposit base (graph 3.20).
Off-Balance Sheet Operations
The risk of maturity mismatch is moderate as the dominance of short-term deposits is accompanied by a relative preference for short-term loans. However, there is still some scope to further mitigate this risk by encouraging longer-term deposits such as term and savings deposits. 8Other quasi-cash deposits include foreign currency deposits from residents, marginal deposits for LCs, outstanding remittances and bank repo transactions with private parties.
Foreign Exposure
- Profitability
- Regulatory Capital and Asset Quality
- Liquidity
- Leverage
It is because of these historical realities that the Saudi banking sector has a built-in hedge against negative external developments. The banking sector continued to enjoy high profitability in 2014, with bank profits increasing by 12.5 percent to SAR 40.2 billion in 2014. The Saudi banking sector is also highly capitalized compared to other advanced and emerging market economies .
The Saudi banking sector has maintained a leverage ratio of around 12 percent, well above the minimum 3.0 percent set by the Basel Committee on Banking Supervision (BCBS).
Risk Outlook of Banking Sector
The current retention ratio of the Saudi insurance industry reflects less reliance on the reinsurance market. Health and motor insurance sectors continued to dominate the insurance market share as they together accounted for 77.9 percent of the overall. The share capital of the entire insurance industry increased by 5.6 percent to SAR 10.3 billion in 2014.
Although the overall profitability of the Saudi stock market decreased slightly in 2014 compared to the previous year (Table 6.2), the market continued to perform well.
Non-Bank Credit: Recent Trends and Initiatives
Credit Performance of SCIs …
However, their total outstanding loans between 2008 and 2014 showed an annual growth of 12.3 percent and reached SAR 310.9 billion, equal to 19.9 percent of total credit (bank and non-bank) and 25.8 percent of bank credit to the private sector (Graph 4.1). The importance of SCI operations can be gauged from the fact that their total outstanding credit was 11.0 percent of total GDP and 19.4 percent of non-oil GDP in 2014. Both ratios were in line with the past trend, which ranged between 8, 0 percent and 11.1 percent of total GDP and 17.1 percent and 19.8 percent of non-oil GDP (graph 4.2).
The Real Estate Development Fund's loan share in the total outstanding loan of SCIs was 41.6 percent in 2014, followed by the Public Investment Fund (29.1 percent), the Saudi Credit and Savings Bank (11.9 percent), the Fund Saudi Industrial Development (9.9 percent). , and the Agriculture Development Fund (2.8 percent).
Non-Bank Finance Sector
The low dependency on the reinsurance market clearly indicated the fact that the major part of the market risk is assumed by the insurance companies. The decrease in the ratio of net losses (net claims incurred/net premium earned) in 2014 indicates improvement in the operational performance of the insurance sector which was a concern in the past. The health of the Saudi insurance sector is recovering and almost meeting the solvency margin requirements set by the insurance law and implementing regulations.
SAMA, CMA and the Capital Markets Authority (CMA) and the Stock Exchange (Tadawul) are collaborating to undertake a strategic review of the current Saudi Clearing and Settlement Process (CSP) along with an assessment of the associated risks.
Insurance Sector: Performance, Coverage and Resilience
Overview
SAMA is the main regulator of the insurance market, but other regulatory authorities are also involved. The insurance penetration rate, measured by the ratio of gross premium (GWP) to non-oil GDP, which indicates the contribution of the insurance market to non-oil production, averaged 1.0 percent in 2010-14 (Figure 5.1). The retention ratio, which indicates the percentage of GWP retained by insurers, increased to 79.8 percent in 2014 from 76.2 percent in 2013 (Figure 5.6).
Health and motor insurance continued to contribute largely to insurance activities as their respective GWPs grew rapidly by 21.9 percent and 26.3 percent in 2014 (Chart 5.4).
Profitability Pattern
While health and auto insurers, which accounted for 77.9 percent of total GWP, ended 2014 with high retention ratios of 93.2 percent and 94.7 percent, respectively, retention rates were significantly lower for the remaining insurance types, reaching level as low as 2.0 percent for. This happened mainly due to two factors: an increase in the required level of provisions in relation to the increase in expected damages and inadequate pricing. Both return on equity (ROE) and return on assets (ROA) improved year-on-year to 7.3 percent and 1.6 percent in 2014, respectively, compared to -15.4 percent and -3.4 percent in in 2013 (graph 5.9), which is the result of inadequate pricing and high market competition, which also played its role, as it led to a reduction in premiums below the levels recommended by insurance actuaries.
Saudi companies tap the market and hold significant shares of motor and medical insurance.
Measures to Reinforce Resilience
SAMA is one of the key institutions that have continued to contribute to the efficiency and safety of the financial market infrastructure to strengthen the Saudi financial system. The SARIE Operating Rules and Regulations (ORR) govern the use and operation of the central system. SAMA is currently in the design phase of the ACH project and implementation is planned for the next few years.
These rules and regulations are the guiding principles for auditing and monitoring the information security of the Saudi banking sector.
Stock Market Trends
Overview
- Market Concentration
- Market Openness
The Saudi stock market has shown stable and steady growth over the years with significant trading since 1970. The Saudi stock market is by far the largest among the Gulf Cooperation Council (GCC) countries. A year later, GCC residents also gained direct access to the Saudi capital market.
The Saudi government recently passed another policy decision allowing certain qualified foreign institutional investors (QFIs) to invest directly in the Saudi stock market in 2015.
Market Regulations and Surveillance
- Prudential Rules
In 2008, non-resident foreign investors were also allowed indirect access to the Saudi market through Saudi Arabia Equity Swap (SES) contracts. In 2010, exchange-traded funds (ETFs) were introduced to allow non-resident foreign investors to invest in them directly. This expected further opening of the market to QFIs in the second half of 2015 will further promote stability as they are qualified investors who can increase the level of maturity and sophistication of the market.
Market Resilience
- Profitability
- Corporate Leverage
All sectors' total cash holdings in relation to their total short-term debt was at a significantly high level of 192.65 percent. They appear to be well positioned in the face of adverse economic developments due to relatively small holdings of short-term debt together with cash holdings large enough to meet their short-term debt obligations. Their respective short-term debt to total debt ratios remained well below the 50.0 percent mark in 2014 (Table 6.4).
They also preferred to maintain cash balances at levels high enough to effectively meet short-term financial obligations.
Profile of SARIE System
SAMA with the cooperation and support of commercial banks and other government agencies has developed a series of payment and settlement systems such as the Saudi Arabian Interbank Rial System (SARIE) and the SADAD Payment System (SADAD) to facilitate economic development and promote financial . stability in Saudi Arabia.
Development of Low-Value ACH
The goal is therefore to enable participants to develop new financial services and products in accordance with the strategic vision of the Saudi capital market and to improve responsiveness to local and global trends in product and service innovation. To identify gaps in the current CSP and define an implementation plan that will be in line with international standards and will help achieve the desired results. SAMA has established a series of vehicles designed to support simple entry-level account structures with low-cost payment capabilities to extend the reach of banking services to the currently unbanked segment of the population.
In short, when ACH becomes operational, it will enable SARIE to operate as an independent BPRC, increase the overall resilience of the cashless payment system, reduce reliance on cash, improve the efficiency of the financial ecosystem, and promote economic development.
Compliance with International Standards
Improve the regulatory framework and regulatory supervision and control: the project assesses the clarity and homogeneity of standards;. Defining marketing methods and products according to future needs: CSP must be flexible enough to support innovation in the development of new products, marketing methods, use of technology and steer the market towards best practices.
Refinement of Existing Clearing and Settlement Process
Promotion of Prepaid Debit Cards
Prepaid debit cards operate through the SPAN payment infrastructure and serve diverse groups such as expats, tourists, youth and underserved citizens. These major groups in Saudi society that were previously underserved or excluded from the banking/financial community. The Prepaid Package enables better access to banking services for these communities and supports wider ambitions for less money and wider financial inclusion, given their size and contribution to the economy15.
SAMA has also reviewed the entire value chain of bank accounts and related payments to ensure that the product offering is safe and reliable and that these services meet the needs of all stakeholders.
