Saudi Arabia Economic Update 26 April 2017

Transcription

1 Economic Research Saudi Arabia Economic Update 26 April 217 Saudi Arabia: No change to our non-oil GDP growth forecast following wage cut reversal Limited support to consumption from wage cut reversal We maintain our 217 real non-oil GDP growth forecast for despite the announcement on 22 April that cuts to public sector wages and benefits will be reversed (please see our Global Data Watch April, published on 24 April 217). The wage/benefit cuts were introduced in September 216 and impacted the allowances, financial benefits and bonuses of civil and military personnel (Fig. 1). We do expect limited support to private consumption from May on the back of the reversal of the salary cuts. However, the indicators of non-oil activity remained lacklustre in 1Q217, and we were looking to lower our real non-oil GDP growth forecast ahead of the announcement. The data so far point to stability in non-oil economic activity rather than a moderate pick-up as implied in our forecast. However, we now see some of the forecasted gradual strengthening in non-oil economic activity being provided by the reinstating of wages to the original levels. Thus, we maintain our real non-oil GDP growth forecast of 1.4% in 217, up from.4% in 216. Economics Team Monica Malik, Ph.D. Chief Economist +971 () Monica.Malik@ Shailesh Jha Economist +971 () Shailesh.Jha@ Contents I. Supporting Charts 3 II. Macroeconomic Indicators 1Q non-oil indicators weak; stability rather than growth None of the drivers of domestic demand private consumption, investment and government spending have shown any indication of strengthening so far this year. Proxy indicators of household spending (ATM withdrawals and PoST combined) were up just.1% y-o-y in 2M217 despite the higher oil price and absence of further announcements of fiscal reforms (Fig. 2). The September wage cuts have been central to the flat spending backdrop. The weak consumer demand is also being reflected in the inflation data, with price discounting resulting in deflation in a number of inflation sub-components, including food, clothing and transportation (Fig. 3). Meanwhile, project activity in 1Q remained lacklustre; the value of project awards falling by.% y-o-y. The government also continues to place on hold, cancel or restructure ongoing projects, and government spending remains restrained. Indeed, the government has indicated that a further USD4. billion worth of savings have been found (including projects and development plans) in 217 so far. Domestic demand to remain structurally soft We believe that any pick-up in domestic demand from the reinstating of wages will likely be limited, both in duration and magnitude. This is partly as a result of expectations of further fiscal reforms, which will likely temper the rise in positive sentiment (Fig. 9). Some of the reforms due to be introduced in 2H217 include excise duties on tobacco and sugary drinks (2Q), the SAR1 levy per month on dependants of expatriates, fuel reforms and linking electricity prices to a reference price. We believe that electricity and fuel price reform will have the greatest impact on domestic demand, though there has been no disclosure on what the reference price for electricity will be at this point. A three-month amnesty on illegal labour (started 29 March) could also have a limited negative impact on personal spending. Please see next page for continuation of text 1

2 Saudi Arabia Economic Update 26 April 217 Government support vital to boost domestic activity Progress with the government s investment or stimulus programme will remain vital for a sustained strengthening in non-oil activity. This is because household consumption and private investment are set to remain weak given further fiscal reforms, especially those related to the liberalisation of utility and fuel prices and the introduction of VAT (1Q218). Given the weak underlying demand in the economy, we did not expect any pick-up in private sector investment or activity once the backlog of payments were made to contractors in 4Q216 and 1Q217, and our expectations were confirmed. There have been some signs of tentative progress with the government s transportation projects in 2Q with the award of contracts linked to three airports (Taif, Al-Qassim and Hail). The development of these projects is on a PPP basis, and private investment will be critical given the government s tight fiscal position. However, the pace of overall progress has been slow, and higher government-led investment activity is a key assumption behind our stronger non-oil GDP growth forecast for 217. Thus, we still see downside risks to our real non-oil GDP growth forecast. The 217 fiscal budget looks to make progress with critical projects, including in infrastructure, transportation and related to industrial cities. Progress with investments will also be important in meeting the wider objectives of the National Transformation Plan. Limited details of proposed stimulus for private sector The government has also proposed a SAR2 billion stimulus package to support GDP growth until 22, of which SAR42 billion is earmarked for 217. This was announced in the official Fiscal Balance Programme, published at end-december 216, which looks to balance the fiscal budget by 22. So far, limited details of the plan have been released. Recent comments suggest that one area of support could come in the form of cheap loans to private-sector companies in labour-intensive industries. We again believe that the direct support to economic activity could be limited unless the loans are linked to wider development schemes given the soft demand in the economy. Other announcements linked to the scheme could come shortly. Moreover, 1% Saudiisation was recently announced for shopping mall and car rental staff, with an aim to boost employment of nationals. Fiscal improvement with higher oil income and restrained spending We estimated that the fiscal savings generated from the wage reductions could have been in the magnitude of 1.-2% of GDP per annum. Official statements indicate that the decision to reverse the salary cuts was due to the improvement in the fiscal position. We see the improvement largely coming from the higher oil revenue, with the rise in oil prices compensating for the output cut and restrained government spending. Official comments suggest that the fiscal deficit was just USD6.9 billion in 1Q217. This is equivalent to 1% of our 217 GDP growth forecast. We see some potential for higher government spending in the remainder of 217, partly linked to the private-sector stimulus package, and the reversal of wage cuts. The drawdown of SAMA s FX reserves in 2M217 also suggests a larger fiscal deficit in 1Q. We currently forecast a fiscal deficit of c.1.1% of GDP in 217, though we would highlight that a narrower deficit (through weaker government spending) could also result in weaker domestic growth. We believe that the government will look to make progress with key fiscal reforms despite the reversal of the wage cuts. However, the reversal highlights i) the difficulty in progressing with some areas of fiscal reforms, and ii) challenges of a multi-year fiscal reforms programme, with the cumulative impact corporates and households. The impact of the upcoming reforms will be partly muted by the Household Allowance Programme, aimed at protecting lowerincome households from increases in the costs of living. Registration for the programme started in February 217. We believe that Saudi Arabia is still at the relatively early stages of its fiscal reform programme. 2

3 Jan-14 Mar-14 May-14 Sep-14 Nov-14 Jan-1 Mar-1 May-1 Sep-1 Nov-1 Mar-16 May-16 Sep-16 Nov-16 Jan-17 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Nov-14 Mar-1 Nov-1 Mar-16 Nov-16 Mar-17 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Oct-14 Jan-1 Apr-1 Oct-1 Apr-16 Oct-16 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Oct-14 Jan-1 Apr-1 Oct-1 Apr-16 Oct-16 Jan-17 Saudi Arabia Economic Update 26 April 217 I. Supporting Charts Fig. 1. Changes to public sector wages and benefits announced in September 216 that have now been reversed Salaries of ministers (or those of ministerial rank) reduced by 2%; A 1% reduction in the annual subsidy granted to Shoura Council members for housing and furnishing; A 1% reduction in the lump sum paid to Shoura Council members for their car maintenance and fuel costs for four years; Overtime bonuses were curbed at between 2-% of basic salaries; No annual increment for 217; Hiring and renewal of contracts for expatriate workers in non-essential sectors suspended; All appointments in vacant posts halted; Provisions of vehicles for senior officials suspended until next year; Annual leave may no longer exceed 3 days; Monthly transportation allowance for employees during vacation days stopped. Source: SPA, various media sources, ADCB estimates Fig. 2. Proxy indicators of private consumption indicate stabilisation in spending in early 217 % change y-o-y, 3M moving average 3 2 Value of PoST ATM Withdrawals Fig. 3. Inflation dynamics in 1Q217 point to weak personal consumption and limited fiscal reforms % change y-o-y 1 1 Food & Beverages Overall CPI Transportation Clothing & Footwear Housing & Utilities Source: SAMA, ADCB calculations -1 Source: General Authority for Statistics, ADCB calculations Fig. 4. Letter-of-credit data for private sector imports reflect weak demand for capital and consumer goods % change y-o-y, 3M moving average Total Building Materials Source: SAMA, ADCB calculations Foodstuff Motor Vehicles Fig.. Local cement dispatches have been contracting since May 216, with soft private and public capex % change y-o-y, 3M moving average Source: Yamama Cement, ADCB calculations 3

4 Jan-14 Mar-14 May-14 Sep-14 Nov-14 Jan-1 Mar-1 May-1 Sep-1 Nov-1 Mar-16 May-16 Sep-16 Nov-16 Jan-17 1Q213 2Q213 3Q213 4Q213 1Q214 2Q214 3Q214 4Q214 1Q21 2Q21 3Q21 4Q21 1Q216 2Q216 3Q216 4Q216 1Q M217 Saudi Arabia Economic Update 26 April 217 Fig. 6. Project awards in Saudi Arabia (in value terms) remained soft in 1Q, showing no meaningful pick-up USD billion Chemical Construction Gas Industrial Oil Power Transport Water Fig. 7. Pick-up in pace of project awards needed for remainder of 217 in order to outpace 216 levels USD billion Value of Awards (LHA) Number of Awards (RHA) Source: MEED Projects, ADCB estimates Source: MEED Projects, ADCB estimates Fig. 8. Underlying private sector credit demand weak so far in 217 since government payments to contractors were made % change y-o-y Y-o-Y (LHA) M-o-M (RHA) (1) (2) (3) Source: SAMA, ADCB calculations Fig. 9. 2Q217 Jul-17 Mid-217 Mid-217 Jan-18 1Q218 Planned upcoming fiscal reforms highlighted by government until 1Q218 Excise duty on tobacco (1%), energy drinks (1%) and sugary drinks (%). Government estimates that revenue generated could be c..4% of GDP Levies on dependants of expatriates, SAR1 per month Linking electricity 1% to reference price Raising gasoline and diesel prices Levies on expatriate labour when exceeding Saudis, SAR4 per month Introduction of % VAT Source: SPA, Saudi 217 Budget, Fiscal Balance Programme 22, ADCB estimates Fig. 1. Saudi Arabia: Roadmap for planned subsidy reforms Households 217 Link electricity 1% to reference prices Non-households 218 Link electricity 1% to reference prices 219 Based on the readiness of water infrastructure; gradually link water prices to reach reference prices 22 All products to reach 1% of reference price Source: Saudi Arabia Fiscal Balance Programme (published December 216) Gradually link all unpegged products to reach reference prices (except for butane, propane and natural gas) 4

5 Saudi Arabia Economic Update 26 April 217 II. Macroeconomic Indicators Fig. 11. Saudi Arabia: Economic Indicators and Forecasts p 216f 217f 218f Real Sector Average Brent Crude Spot Price, USD p/b Average Oil Production, mn bpd GDP at Current Market Prices, SAR bn 2, , , , ,68.4 2,729.8 GDP at Current Market Prices, USD bn Real GDP Growth Rate, % (.4) 1.1 Real Non-Oil GDP Growth Rate, % Population, mn GDP / Capita, USD 24,893 24,81 2,766 19,98 2,974 21,8 CPI Inflation, % average Fiscal Sector Budget Balance, USD bn 48.2 (17.) (96.7) (17.3) (69.4) (63.2) Budget Balance, % of GDP 6.4 (2.3) (14.8) (16.8) (1.1) (8.7) Gross Government Debt, % of GDP Net Banking Sector Claims on the Government, USD bn (424.2) (42) (287) (186) (14) (11) External Sector Trade Balance, USD billion Current Account Balance, USD bn (.4) (.6) (24.2) (21.1) Current Account, % of GDP (7.7) (7.9) (3.) (2.9) FDI, USD bn Total Net Foreign Assets, USD bn Financial Sector Growth Rate in Broad Money, % Growth in Credit to the Private Sector, % Benchmark Lending Rate, end-of-period, % USD/SAR Exchange Rate, annual average Source: General Authority of Statistics, SAMA, IMF, ADCB estimates

6 DISCLAIMER 26 April 217 This report is intended for general information purposes only. It should not be construed as an offer, recommendation or solicitation to purchase or dispose of any securities or to enter in any transaction or adopt any hedging, trading or investment strategy. Neither this report nor anything contained herein shall form the basis of any contract or commitment whatsoever. Distribution of this report does not oblige Abu Dhabi Commercial Bank PJSC ( ADCB ) to enter into any transaction. The content of this report should not be considered legal, regulatory, credit, tax or accounting advice. Anyone proposing to rely on or use the information contained in the report should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts regarding information contained in this report. Information contained herein is based on various sources, including but not limited to public information, annual reports and statistical data that ADCB considers accurate and reliable. However, ADCB makes no representation or warranty as to the accuracy or completeness of any statement made in or in connection with this report and accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained in this report. Charts, graphs and related data or information provided in this report are intended to serve for illustrative purposes only. The information contained in this report is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to their determination. All statements as to future matters are not guaranteed to be accurate. ADCB expressly disclaims any obligation to update or revise any forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. This report is being furnished to you solely for your information and neither it nor any part of it may be used, forwarded, disclosed, distributed or delivered to anyone else. You may not copy, reproduce, display, modify or create derivative works from any data or information contained in this report. 6