Unprecedented Pandemic adds to challenge

COVID-19 has shaped up to be a significant exogenous shock for Kingdom of Saudi Arabia (KSA) as it throws up dual challenge for authorities to deal with not only local infection and ensuing economic damage but also soft commodity prices. Macro targets are set to undergo adjustments, however, major thrust on economic development and reforms as enshrined in Vision 2030 is set to persist. The underlying strength of the economy (SAMA reserves, support from state-owned institutions, flexibility on expenses), coupled with dividend from diversification of economy, provides much-needed flexibility to authorities in drawing up fiscal and monetary response to the challenge

Recalibration of economic targets is inevitable 

With soft commodity prices and disruption in economic activity, we expect both Real GDP (-2% YoY) and Nominal GDP (-14%) to shrink in 2020 before recovering to +2/+5% respectively in 2021. Almost all sectors of economy will likely face the brunt of challenging external environment and COVID-19 related economic slow-down in 2020. We eye widening of fiscal deficit to 13/9% in 2020/21(vs 4.6% in 2019) due to fiscal stimulus and stress on fiscal revenues while our preliminary estimates suggest Current Account Deficit (CAD) of 2.0/0.5% in 2020/21(vs surplus of 6.3% in FY19). We expect SAMA to resist further rate cut. Imported food inflation remains a major risk. We base our estimates on USD 38/40/bbl average oil prices and 7.5/8.0 mb/d of oil exports in 2020/21.

Authorities have been quick to respond to COVID-19 Pandemic

Globally, new COIVD-19 cases in the US, Europe, sub-continent continue to show deceleration, leaving room for controlled normalization of economic activity. Bold but measured policy actions with due attention to social and economic aspects, helped in limiting the virus outbreak in KSA. With total cases of ~16k as on 25th Apr’2020, KSA has one of the lowest infection/person and one of the highest recovery rate. To cushion the economic cost to businesses and consumers, authorities have timely unveiled a generous economic stimulus package (USD 48bn or 6.5% of GDP, USD 13.3bn earmarked for SME).

Oil prices-OPEC+ deal addresses concern on oversupply for now

We are cautiously optimistic on recent supply arrangement between OPEC and nonOPEC producers. The deal, though clearly provides a consensus framework to producers to deal with unprecedented demand contraction, faces risks from three major sources. That said, we believe volatility in oil prices will likely hasten the pace of natural production cut by high-cost producers and may lead to early restoration of demand/supply balance. KSA, with its lowest cost advantage and now demonstrated capacity to ramp up volumes, is set to emerge strongly from the chaotic phase, in our view.

Global Economy- fears of deep recession; all eyes on reopening

Latest data points to wide spread demand destruction in major economic centers and a deep global growth recession in Q2/Q32020. IMF forecasts drop in global GDP to 3% in 2020 (+3.3% pre-COVID-19) followed by a protracted economic recovery. A multitude of monetary and fiscal stimuli have been unveiled to better manage financial stability. All eyes are on much-talked about 2nd wave of infection as economies come back to life.

Tadawul: Strong rebound, valuation leave little upside for now

We believe room for further near-term, broad-based performance in TASI is limited post 10.8% rebound since 16th Mar’2020. Current valuation (based on Bloomberg) and future earnings outlook (downside risk seen) further lend support to our view. Quality & size, D/Y and valuation remain key criteria for stock selections. Our top picks include RJHI, STC, MOUWASAT, ALMARAI & JARIR.