The Real Economy Index (REI) is a monthly composite diffusion indicator, giving an up-to-date estimate of non-oil activity in the KSA economy.
 
REI contracts further to 43 points in June

REI score went down to 43 in June from 45 in May, mostly due to squeezed private sector non-oil investments (down 3.4% M-o-M & 5.7% Y-o-Y). Consumption also came under pressure in June (down 2.3% M-o-M & 4.6% Y-o-Y). This was despite the recently-announced reinstatement of previously cancelled bonuses and higher consumer spending coinciding with extended Eid holidays. Taxes on tobacco and soft drinks have put pressure on already-sluggish sentiment and consumption, which is set to come under more pressure after the newly imposed expat dependant levy. Estimated gov’t spending recovered (up 3.1% M-o-M & 4.3% Y-o-Y) despite lower oil export proceeds, which we believe fell to USD11.9bn vs. USD12.4bn in May.
 
Reserves edge up in June, but gov’t balances remain weak

Foreign reserves went up for the first time since May 2016 to USD500.7bn in June, driven by USD2.1bn rise in foreign securities holdings. There is only a low probability that the uptick was due to improvement in the government’s revenue stream. Net government balances at SAMA and banks have further fallen by USD1.9bn. Drivers of foreign reserve burn are made less clear by the ongoing shift in foreign assets from SAMA to the Public Investment Fund (PIF), but we believe it may have stabilised and hence the uptick in reserves. Meanwhile, Banks NFA surged by USD2.2bn to USD43bn, the highest in almost a year. Foreign currency deposits at banks (mostly sourced from the private sector) jumped by USD7.8bn, possibly due to Qatari deposits (down by USD4bn) being sent back to Saudi Arabia.
 
Domestic debt issuances resume - SAR17bn sukuk issuance

The kingdom’s first domestic sukuk sale in July is expected to lock up system liquidity for longer and may drive SAIBOR higher (3M prices of 1.795% are up 7.25bps from YTD low). A possible crowding-out of the private sector could happen should rates tick higher, adding more strains to private investment, though demand for credit currently seems low. The latest SAMA data shows private sector credit to have dropped for the first time in 5 months to SAR1,419bn in June (down 1.4% Y-o-Y). We believe that local issuances up to SAR5-60bn can be absorbed without necessarily squeezing domestic liquidity. We also note that another international debt issuance, likely a conventional bond, is planned for 4Q17.