The first quarter of the year did not start well for the MENA region, with the civil unrest that began in the North African states spreading rapidly to several countries in the Middle East. While Bahrain was trying to quell its own problems and struggling in the global spotlight, Saudi Arabia’s King Abdullah quickly subdued the growing murmurs in the kingdom by announcing huge social welfare spending, thereby improving sentiments about the country’s economic growth this year.
After three months of decline, March saw the Tadawul All-Share Index (TASI) climb 10.46% with a positive performance in the following two months, to close at 6,735.98 as at the 31st May, according to Tadawul.
Clearly one country’s loss is another’s gain. The surge in TASI was heavily influenced by the recent skyrocketing of the kingdom’s oil revenue, with crude oil reaching over US$100 per barrel. Saudi Arabia, the world’s largest oil producer with significant excess production capacity, drove this gain by expanding its production to make up for Libya’s decrease.
Eurekahedge data corroborates this event, as seen in Islamic Finance news (Volume 8, Issue 24), revealing that the top 10 global Islamic equity funds of a three-month return were domiciled in Saudi Arabia.
The Saudi economy is forecast to grow between 5% – 7.5% this year on the back of recent economic stimulus measures launched by the government, which plans to spend a further US$93 billion to boost the country’s real GDP performance this year. Its central bank has placed the growth figure at 6%.
The kingdom has pledged to spend about US$130 billion, or around 30% of its annual economic output, on new houses, creating jobs, unemployment benefit and other measures.
The largest amount of this spending will go to building about half a million new public houses estimated at US$66 billion, providing additional resources for the Real Estate Development Authority and the General Housing Authority.
As the majority of Saudi citizens work in the public sector, the pledge to increase government salaries will also translate into an increase in public spending, thereby fueling the non-oil economy.
This will play “an increasingly vital role for the economy, as the government’s initiative to diversify the economy away from the hydrocarbon sector would boost private consumption,” said one report.
As some of the funds do invest in the banking and finance sector, a brief mention is warranted. The banking sector also looks to benefit from the government’s stimulus package, with asset growth forecast to be over 8%, compared to 2.5% last year. Fitch Ratings provided a stable outlook for Saudi’s banking sector, citing the institutions’ sound capitalization, improving asset quality and strong funding profiles as their key strengths, besides leveraging on the sovereign’s rating.
All these elements are key to the continued strong performance of Saudi equity funds.