Saudi Arabia: Weaker energy prices and an ambitious reform programme aimed

Weaker energy prices and an ambitious reform programme aimed at increasing private sector participation in the economy were key themes of 2016 as Saudi Arabia accelerated efforts to diversify its economy.

While oil prices made a modest recovery from $30 per barrel at the beginning of the year to $50 in the fourth quarter, both national gain and GDP have been impacted.

In mid-October the IMF revised its increase estimate for the Saudi Arabian economy in 2016 to 1.2%, down from the 1.6% estimate issued in May and the 3.5% posted the previous year.

Economic overhaul

In April the government unveiled Vision 2030 – its long-term plan for economic and social reform. The strategy emphasises the involvement of the private sector and targets lifting its GDP contribution from 40% to 60% by 2030.

Much of this increase is expected approaching from small and medium-sized enterprises, whose contribution to the economy is projected to rise from 20% to 35% by 2030.

Later in June the National Transformation Programme (NTP) 2020 was revealed. As a policy roadmap for achieving the government’s medium-term goals, the NTP sets out clear objectives, inclunding increasing non-oil revenue from SR163.5bn ($43.6bn) to SR530bn ($141.3bn), creating 450,000 new jobs and expanding of the role of women in the workforce.

While seeking to broaden the economic base, the NTP as well aims to relieve pressure on the treasury through cuts to subsidies on goods and services and moves to introduce new levies, inclunding an gain tax on Saudi nationals.

Narrowing the deficit

In late December Saudi Arabia announced its new budget. Spending is set to increase by 7.9% to SR890bn ($237.3bn) under the plan, suggesting at least a temporary break from the austerity measures undertaken in 2016.

Higher oil revenues and enhanced revenue streams are expected to counteract this increase in spending, leading the government to estimate a reduction in the budget deficit from an estimated SR297bn ($79.1bn), or 11.5% of GDP in 2016, to SR198bn ($52.8bn), or 7.7% of GDP this year. This follows successful work to curb the deficit of SR362bn ($96.5bn) posted in 2015.

Some of the latter figure was bridged via an oversubscribed $17.5bn international bond issue in mid-October – the major-ever from an emerging market – which not only allowed the government to inject additional funds into the local economy but as well eased pressure on fiscal reserves.

Furthermore, the move allowed the Kingdom to begin repaying overdue debts to contactors – an issue that had dampened investor sentiment throughout the time– with the government making a SR40m ($10.7m) payment it owed to local companies in November.

An extra measure to reduce national outlays came in September, with the announcement of a freeze on wage increases for public servants and the cancellation of bonus payments.

However, with some two- thirds of the Kingdom’s workforce employed by the national, the reduction in payments will likely curb retail and other discretionary spending, at least in the short term.

Taking stock

The NTP as well set the target of increasing foreign investment and boosting private sector participation in the economy. Under capital markets reforms announced in May and set approaching into force in 2017, qualified foreign investors (QFIs) will have access to a broader range of capital market products, inclunding listed securities. Meanwhile, the minimum assets under management requirement for QFIs has been lowered from SR18.75bn ($5bn) to SR3.75bn ($1bn).

Sector regulator, the Capital Market Authority, is as well raising the maximum stake a QFI may hold in any listed issuer from 5% to 10%. However, the restriction on the total number of shares foreign investors in all categories can own in a listed Saudi Arabian company will remain at 49%.

The exchange will as well be given a significant boost through the planned privatisation of a lot of national-owned enterprises, inclunding energy giant Saudi Aramco.

Announced in January 2016, up to 5% of Saudi Aramco’s price could be offered. Given the corporation’s book valuation of up to $3trn, the sale could generate $150bn for the national.

Mixed indicators

Consumer prices increased 2.3% year-on-year in November, down from 2.6% a month before, according to data from the General Authority for Statistics. Despite higher costs of fuel and national services, this marked the continuation of a steady decline in inflation from a peak of 4.3% in May.

Inflation could remain low into the new year as austerity measures – inclunding the lowering of the public wage bill – see consumer request cool, taking the heat out of any inflationary pressures.

This slowing of consumer request, and with it confidence, was reflected by weaker performance of the Kingdom’s non-oil sector. According to October’s Saudi Arabia Purchasing Managers’ Index (PMI) – a measure of operating conditions in the non-oil private sector produced by financial services company IHS Markit – the sector eased from 55.3 points in September to 53.2. While still in positive territory, with any reading above 50 representing increase, the result was a record low for the index.

However, a rebound any minute at this time followed next the Kingdom’s initial international deficit issuance in late October, with the PMI reaching 55 points in November, reflecting expansion in non-oil output and purchasing activities.