Monday 20 November 2017
 
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ANALYSIS

Saudi reform programme to remain on track: report

DUBAI, 22 days ago

Recent news reports raise the possibility for Saudi Arabia's reforms to be more gradually implemented to support economic activity, according to a new study from Bank of America Merrill Lynch (BofAML).

The government is likely able to proceed with VAT introduction in the first quarter of 2018 (1Q18), BofAML’s GEMs Macro Monthly report said.

Women driving could add 0.4 percentage points to growth, according to an IMF study, and development of a domestic entertainment industry could support activity over the medium-term. The diversification projects that the PIF intends to lead are predicated on proceeds of the Aramco IPO. The $500 billion NEOM city announced by the Crown Prince suggests focus on growth but the project faces funding and execution challenges.

Possible revision to transformation agenda

A Financial Times (FT) article is suggesting that Saudi Arabia is working to redraft the National Transformation Plan (NTP). The NTP was mostly focused on the diversification agenda (rather than on fiscal reforms) and was challenging in terms of timeline. A delay would allow more time for ministries to meet their targets. The article suggests privatization goals (outside of the oil sector and Saudi Aramco) could be pushed back, which could reflect that more time is needed for execution and for preparing privatization targets to float.

 The NTP does include some fiscal reforms although in a sketchy form (domestic energy price reforms, increase in non-oil government revenues, wage bill). These reforms were since moved out from the NTP and included in the government's Fiscal Balance 2020 program. So the article suggestion of revisions to NTP targets may still be consistent with continued fiscal reform plans and may not involve a revision of fiscal plans.

2Q17 budget deficit data mixed

Saudi Arabia’s fiscal performance over 1H17 suggests spending discipline as well as continued reliance on oil to boost revenues. This is partly on account of higher transfers from Saudi Aramco, according to BofAML.

The 2Q17 fiscal deficit stood at SR46.5 billion ($12.5 billion), better than expected. Authorities appear to have underspent the budgeted target, helping improve fiscal accounts. This may exclude SR20 billion of arrears to contractors repaid over 1Q17.

Forex reserves assets drop in August

Saudi Arabia Monetary Agency (Sama) total reserve assets dropped by $6.8 billion to c$488 billion in August, likely due to withdrawals from government entities. The continued drawdown in Sama FX reserves in alongside tighter fiscal balances highlights the challenge to stem continued capital outflows. Still, the large build-up of forex deposits abroad in 1Q17 may reflect redeployment of PIF assets. Sama forex reserves are supported by $81 billion in the foreign assets of independent institutions and agencies managed off-balance sheet by Sama.

 Oman: Fiscal slippage continues

The continued large twin deficits imply a need for material external financing to prevent sustained erosion in foreign assets and to defend the USD peg. Availability of foreign financing is key to avoiding a hard landing near term. Twin deficits hovered around 20 per cent of GDP in 2016, and, despite likely narrowing this year, will remain elevated this year.

Gross foreign assets are declining. Large external borrowing and potential support from non-resident entities have prevented a more rapid erosion of gross foreign assets than implied by external imbalances.

Total gross foreign assets, including CBO, the State General Reserve Fund (SGRF), the Petroleum Reserve Fund (PRF), the Infrastructure Project Finance Account (IPT), and Oman Investment Fund (OIF), have declined to $38.8 billion (64.9 per cent of GDP) at end-2016, from a peak of $51.5 billion (66 per cent of GDP) in 2013. Liquid foreign assets likely represent c2 years of external financing needs, providing some near-term cushion.

The 2016 budget deficit was revised higher by 2ppt to 22 per cent of GDP, and the year-to date 2017 fiscal deficit annualizes 17 per cent of GDP. The requirement to hire 25,000 civil servants by year-end could add c1 per cent of GDP to spending.

The continued repayment of the Iranian forex deposits at the CBO adds c$2-3 billion to external financing needs over the next 6-9 months. Potential bailout talks are unlikely to be conclusive for now. The investment grade rating remains at risk in the medium term. – TradeArabia News Service




Tags: Saudi Arabia | Oman | aramco | Budget | GDP | reforms |

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