Saudi shares fall but ends off lows after budget announced

Many of the austerity measures had been expected and were partly factored into stock prices before the announcemen

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Saudi Arabia’s stock index fell but closed well off its lows on Tuesday after the 2016 state budget introduced spending cuts, rises in fuel, natural gas feedstock and electricity prices, and tax hikes. Other markets in the region were mixed.

Analysts welcomed the budget as showing the government’s willingness to adopt difficult reforms to address a huge deficit caused by low oil prices. As such, it could help to sustain confidence in the riyal’s peg to the U.S. dollar.

“It is a step in the right direction, as these steps will not bring the budget into balance again but do help to improve the fiscal sustainability of the country and its ability to withstand low oil prices now and in the future,” said Jaap Meijer, managing director for equity research at Arqaam Capital in Dubai.

Many of the austerity measures had been expected and were partly factored into stock prices before the announcement, analysts said.

In addition, they said, the 2015 deficit of 367 billion riyals ($97.9 billion) was lower than the 400 billion to 450 billion riyals which many investors had feared, and the planned cut in 2016 spending was smaller.

Nevertheless, some Saudi stocks were sold indiscriminately on Tuesday as retail investors reacted badly to the biggest shake-up to economic policy for over a decade. The main index ended down 0.9 percent at 6,931 points, off a low of 6,756 points.

Petrochemical producers, which generally account for about a third of the market’s capitalization, were particularly hard hit as their margins will be hurt by more costly feedstock.

Saudi Basic Industries, the biggest petrochemical producer, tumbled 4.0 percent and Saudi Kayan lost 2.1 percent. Methane was raised to $1.25 per million British thermal units and ethane to $1.75, from 75 U.S. cents for both.

“Saudi petchem producers have lost the cost advantage, and they cannot pass on this cost in their prices to end-users because that is determined by market forces of demand and supply,” said Iyad Ghulam, analyst at NCB Capital.

Absorbing costs

He added, however, that the companies could absorb some of the costs because they have large operating margins, so they would not necessarily post losses in 2016.

Construction and cement firms are likely to be hurt by spending cuts in the budget. Abdullah Abdul Mohsin al-Khodari Sons slid 0.9 percent, and Saudi Cement Co fell 2.2 percent after saying it would take a charge of 66.2 million riyals this quarter as it wrote off two kilns that would remain idled indefinitely - a sign of a gloomy demand outlook.

Santhosh Balakrishnan at Riyad Capital noted cement firms were heavy users of natural gas. “With a 67 percent hike in feedstock prices, this will have a significant squeeze on margins, because the cement producers will not be able to pass on the higher cost to the consumer since there is still a huge surplus of cement, close to 22 million tonnes.”

Utility Saudi Electricity Co, which had jumped 9.9 percent on Monday in anticipation of the electricity price hike, dropped 5.7 percent.

However, rising stocks outnumbered losers 88 to 64 as many second- or third-tier stocks such as insurers climbed. Many banks also gained as they were seen as not directly vulnerable to the austerity steps; Alinma Bank rose 4.8 percent.

Elsewhere in the Gulf, Dubai fell in early trade but ended 0.5 percent higher. GFH Financial, a speculative favorite that was the market’s most heavily traded stock, jumped 7.5 percent.

Abu Dhabi gained 1.0 percent on the back of banks. National Bank of Fujairah, which rarely trades, jumped 14.9 percent in its heaviest volume this year.

Qatar closed flat. Petrochemical shares were strong as Saudi Arabia’s budget may weaken competition from producers in that country; Industries Qatar added 1.8 percent and Mesaieed Petrochemical rose 0.4 percent.

Egypt’s index climbed 0.8 percent as real estate firm Palm Hills Development gained 1.2 percent. But GB
Auto slipped 3.6 percent after it said it planned to allocate 2 percent of its total shares to an employee compensation program.

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