RIYADH: Companies listed on the Saudi stock market are deriving an increasing share of their revenues from abroad. In 2010 total foreign revenues (earned from exports, foreign subsidiaries and foreign investments) were SR212 billion, 42.5 percent of total revenues, up from SR63 billion (29.7 percent of the total) in 2005, according to a report released Saturday by Jadwa Investment Research Department.
"With production being ramped up at major new export-oriented projects, we think this proportion will increase further. The growing exposure to foreign markets is good for Saudi companies, though it is also one reason for the tighter relationship between the TASI (Tadawul All-Share Index) and global stock markets and the relatively weak performance of the local market given the healthy domestic economy," the Jadwa report said.
The report examined the annual reports of all listed companies over the past six years to determine their revenues from abroad, earned either by foreign sales, foreign operations or, in the case of multi-investment companies, portfolio investments in foreign countries.
Virtually all companies now publish this information, though in some instances there has been estimated data. Between 2005 and 2010, revenues generated in foreign markets rose by an average annual rate of 30 percent. In contrast, domestically generated revenues grew by an average of 14 percent per year over the same period. Foreign revenues grew rapidly until 2009, when the global recession caused a modest downturn. A new high was recorded in 2010, in both absolute terms and as a percent of the total, largely due to greater petrochemicals production and prices.
Companies in 11 of the 15 stock market sectors earn revenues from abroad, with petrochemicals generating by far the largest. In 2010, it earned SR178 billion in export revenues, accounting for 84 percent of total listed company foreign revenues. SABIC (Saudi Basic Industries Corp.) contributed 86 percent of the total for the petrochemicals sector. This dominance emphasizes the key role petrochemicals play in earning nonoil export receipts for the Kingdom and the relative lack of other sources of foreign revenue.
Nonetheless, there has been a significant rise in foreign revenues from other sectors. In 2010 they accounted for 13.1 percent of total revenues for the other 14 sectors, compared to 5.1 percent in 2005. Telecoms ranked second, accounting for 7.8 percent of total foreign inflows in 2010, due to the revenues earned by Saudi Telecom Company's (STC's) foreign operations. Only two banks reported details on their income from foreign activities (this does not include revenues from the trading of foreign securities), the Jadwa report added.
Petrochemicals sector also tops the league of foreign revenues as a proportion of total revenues, at 75 percent last year. Multi-investment came next, at 45 percent, though this was as high as 80 percent in 2007, the year of the listing of Kingdom Holding, the largest company in the sector. Since then the Kingdom's revenues have declined relative to others in the sector that have less overseas investment. The building and construction sector has consistently earned around one-third of its revenues abroad from exports and foreign subsidiaries, primarily within the region, similar factors have kept the contribution to industrial investment at around 30 percent.
For three sectors, the report said foreign revenues have fallen as a percent of the total: cement, retail and transport. In each case the proportion has halved. For cement, this is the result of the ban on exports to all countries except Bahrain introduced in 2008 (although the ban has been eased, restrictions remain). Figures for the retail sector are distorted by the subsequent listing of new domestically focused companies; if just those companies that were listed in 2005 are considered, foreign revenues as a proportion of total revenues would be over 15 percent, compared to less than 5 percent for the whole sector. There is less clarity on the data from the transport sector.
The breakdown of revenues by country of origin is important, as there is a clear divergence in the economic performance of emerging markets, which are growing by around 6 percent, and the countries of Europe and North America, which are growing by 1 to 2 percent. Petrochemicals is the only sector that publishes such a geographic breakdown. This shows that Asia is the destination of 40 percent of petrochemical exports, and with the Middle East and Africa accounting for a further 15 percent, more than half of petrochemical exports are going to fast-growing emerging markets. Europe accounts for 29 percent of petrochemical exports and North America only 9 percent. Aside from multi-investment, most other sectors probably earn the bulk of their foreign revenues from within the region.
The Jadwa report said integration of Saudi companies into the global economy is an important reason for the notable increase in the correlation between the Saudi stock market and global stock markets. The petrochemicals sector has the closest correlation of any of the sectors to the US S&P500, followed by industrial investment; two of the three sectors with the lowest correlation (media, hotels and energy) do not have foreign exposure. Nonetheless, it is only part of the reason for the tighter correlation. A change in investor psychology since the collapse of Lehman Brothers has seen the prices of many assets across global markets (including oil, the backbone of the Saudi economy) move more closely together than previously.
The sectors that have the highest proportion of foreign revenues tend to be the most volatile (once insurance and media, sectors that are subject to much local speculation, are removed). Although high foreign revenues provide an important source of diversification and companies benefit from the rigors of international competition, investors appear wary of the exposure to economic, political and exchange rate risk.
The increase in foreign earnings should continue. Saudi Kayan Petrochemical Co.'s export-oriented petrochemicals facility and the Maaden phosphate project have recently started commercial production and petrochemical company Yanbu National Petrochemical Company (YANSAB) is still ramping up output. It is likely that future major export projects will be required to list on the stock market. Data on the imports of listed companies is not available, though this would also show a rise. Therefore, even if relationships between asset prices return to normal, movements in the Saudi stock market will be closer to those of leading global markets than in the past, the Jadwa report said.
© Arab News 2011
