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Market Review and Outlook

Source: NCB Capital

The Saudi Automobiles Suffers from Declining Demand

The Saudi automobile sector is comprised of 20 principal agents, several dealers and approximately 25k auto repairs and maintenance workshops, spread geographically across the Kingdom. The sector largely provides employment to skilled and semi-skilled expatriates. In 2008, the aggregate market value of about 600k new automobiles sold in the country is estimated to have reached SAR42 bn, accounting for about 6% of the total non-oil economy, which makes it the largest trading sector. Imports of motor vehicles financed by local commercial banks are one of the banks' major business segments. They have doubled in the last eight years to reach SAR25.7 bn in 2008. However concerns regarding the direction of the Saudi economy in 2009 have started to weaken the Saudi automobile market. Letters of Credit’s settled and opened for imports have declined by 8.8% to SAR 14.9bn and 17.3% to SAR11.9bn, respectively, during the Jan-Aug09 time period. This is a clear indication that the demand for imported vehicles in 2009 is in decreasing. Going forward we expect this trend to continue throughout 2009 until 1H10.

USD and the Prisoner's Dilemma

The recent stream of data concerning the foreign exchange reserves of central banks, especially their composition is making it the more apparent that countries are becoming more serious about diversifying away from the greenback. In 2Q09, more than 63% of the global incremental increase of USD413 bn in reserves had flowed into EUR and JPY denominated assets, whether they are currency reserves or securities. Meanwhile, the USD's share of new reserves had dwindled to 37%, which is below the historical average of 63% that had been posted since 1999. Developing countries, moreover, have sold an estimated USD30 bn each month since Mar09 for EUR and JPY. Evidently, central bankers and policy makers who are managing substantial reserves had started to realize that Obama's administration is showing more tolerance towards a weaker USD in a desperate bid to boost exports, cloaked in the "balanced & sustainable global growth" argument. Despite this shift, we do believe that what is keeping the USD from a steeper downfall is the Prisoner's Dilemma issue, whereby each country is trying to shed quietly the USD without stirring the suspicion of other holders, in order to take a lesser loss on their reserves. The real question is for how long these countries can maintain this pace of shedding, without triggering an intense sell-off cycle.

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