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 state income and GDP have been impacted.
In mid-October the IMF revised its growth estimate for the Saudi Arabian economy in 2016 to 1.2%, down from the 1.6% forecast 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 growth is expected to come 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, including 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 also aims to ease pressure on the treasury through cuts to subsidies on goods and services and moves to introduce new levies, including an income 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 forecast 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 largest-ever from an emerging market – which not only allowed the government to inject more funds into the local economy but also 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 year – with the government making a SR40m ($10.7m) payment it owed to local companies in November.
Another measure to reduce state 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 state, the reduction in payments will likely curb retail and other discretionary spending, at least in the short term.
Taking stock
The NTP also set the target of increasing foreign investment and boosting private sector participation in the economy. Under capital markets reforms announced in May and set to come into force in 2017, qualified foreign investors (QFIs) will have access to a broader range of capital market products, including 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 also 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 also be given a significant boost through the planned privatisation of many state-owned enterprises, including energy giant Saudi Aramco.
Announced in January 2016, up to 5% of Saudi Aramco’s value could be offered. Given the corporation’s book valuation of up to $3trn, the sale could generate $150bn for the state.
Mixed indicators
Consumer prices increased 2.3% year-on-year in November, down from 2.6% a month previously, according to data from the General Authority for Statistics. Despite higher costs of fuel and state 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 – including the lowering of the public wage bill – see consumer demand cool, taking the heat out of any inflationary pressures.
This slowing of consumer demand, 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 growth, the result was a record low for the index.
However, a rebound soon followed after the Kingdom’s first international debt issuance in late October, with the PMI reaching 55 points in November, reflecting expansion in non-oil output and purchasing activities.
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