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Saudi Arabia: Because (oil) crisis is a terrible thing to waste

Last week, Saudi Arabia approved the National Transformation Program (NTP) that outlines policy initiatives crucial to the success of the ambitious Vision 2030 announced in April. For the uninitiated, Vision 2030 outlines the Kingdom’s objective of 1) diversifying the economy away from oil; 2) high economic growth along with; 3) a consolidation in fiscal accounts.The NTP framework’s major targets and reform measures include further cut back on subsidies, reduction in current expenditure and thrust to key sectors such as tourism, mining, marine industries, healthcare and petrochemicals.  Below are, what we view as the good, the bad and the great aspects of the NTP:

The Good: Reforms not at the cost of fiscal consolidation

In its bid to diversify away from oil, state spending on developing sectors such as housing, tourism, healthcare etc is slated to be paid for by proceeds from asset sale, reduction in government subsidies and cut in wage bill. It is detailed further that most of these diversification initiatives will be done in partnership with the private sector. We view these policy changes as having three positive implications on the economy. Firstly, this marks a shift in state policy with private sector leading as an engine of growth. A trend observed in most developed and developing economies, this will also help achieve efficiency gains. Secondly, diversification is not at the cost of fiscal consolidation. If successfully implemented this will improve the Kingdom’s chances of rating upgrade and thereby reducing cost of borrowing. Lastly, adjustments in public wages could likely push more Saudis towards the private sector jobs.  

The Bad: Near term drag on consumer sentiment and thereby on growth

Near term consumer sentiment will likely take a beating as government subsidies reduce further and public sector wages/employment prospects remain tight. Prospects of implementation of GCC-wide VAT in 2018 and introduction of taxation on “harmful goods” such as tobacco, don’t make things easier. All in all, private consumption will be adversely hit in the near term likely resulting into a fall in aggregate demand. Though this looms over the GDP growth in the short-term, the NTP aims at creation of more jobs for Saudi nationals in the private sector in the medium term. At the moment, the public sector accounts for nearly two thirds of its workforce. Imposing taxes and reduction in subsidies have never been welcomed by consumers in any economy but those are important for efficiency gains and increasing revenue sources.

The Great: Women in workforce and improvement in business climate

Indicating a paradigm shift in not just economic but also socio-cultural objective is the aim to increase female participation in workforce (28% from 23% currently). This is an important step towards creating not only a more equitable society but also increasing its GDP as contributions from non-household work get accounted for in the national income calculations. Some have argued that this is a modest aim, but it does indicate a shift in mindset. The success of this, however, will depend on provision of public transport and other supporting infrastructure.Another critical aspect of the program is the government objective to rank higher in terms of ease of doing business (#20 from #82 currently). Much like the Indian government, the Kingdom aims to render government services electronically and targets improving resolution time for pending commercial cases.

The Unchanged: Monetary policy, USD peg and energy policy

As forex buffers and government deposits dwindle, pressures on SAR-USD peg will exacerbate. We believe that SAMA will maintain the currency peg as it acts as an economic anchor. It will address the liquidity squeeze in the banking sector through asset sale as well as foreign borrowing. Over the medium term, a strengthening USD will help keep import inflation in check, which will be crucial as the economy moves on to a higher growth trajectory. Oil production is also announced to remain unchanged at elevated levels as the policy of maintaining market share remains unaltered.

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