The statement by IMF Managing Director Christine Lagarde on Meeting with Saudi Arabia’s Crown Prince Mohammed bin Salman

SOURCE: INTERNATIONAL MONETARY FUND

Time: March 23, 2018

Christine Lagarde, Managing Director of the International Monetary Fund (IMF), met today with Saudi Arabia’s Crown Prince Mohammed bin Salman in Washington, DC. Following the meeting, Ms. Lagarde made the following statement:

“Crown Prince Mohammed bin Salman and I discussed recent economic developments in Saudi Arabia and the ongoing economic reforms. The authorities are continuing to make good progress in implementing their ambitious reform agenda including through the recent introduction of the VAT and measures to increase women’s participation in the economy. The decision to slow the pace of fiscal adjustment as was set out in the 2018 budget is appropriate. The IMF expects real GDP growth to pick-up this year.”

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Saudi interest rate rise ‘having desired effect’

SOURCE: Arabian Business

Time: March 19, 2018

Saudi Arabia’s decision last week to raise interest rates appears to be having the desired effect, according to economists.

The kingdom’s monetary authority, known as SAMA, unexpectedly raised both its repurchase and reverse repurchase rates on Thursday in a move that may have anticipated a probable hike by the US Federal Reserve this Wednesday. The increase has since narrowed the difference between a key Saudi interbank rate for riyals and the equivalent London rate for dollars, making it less attractive for depositors to shift into US currency.

“The current move by SAMA is likely to have been driven by a need to ensure the appeal of the Saudi riyal in an environment of generally tightening monetary conditions in the developed world,” said Anita Yadav, the head of fixed-income research at Emirates NBD, the United Arab Emirates’ second-biggest bank.

The three-month interbank rate has climbed 16 basis points this week to 2.18 percent, curbing its discount to Libor to about two basis points. Saudi Arabia typically follows US monetary policy because its currency is pegged to the dollar. While the reverse repo rate has been raised over the past two years in step with US rate changes, it’s the first time the kingdom has changed the repo rate since 2009.

Historically, Saibor has been higher than Libor – by more than 150 basis points as recently as 2016. That changed this year amid ample liquidity in the banking system and relatively slow credit growth. On Friday, Saibor was 19 basis points below its US dollar equivalent, the biggest gap in a decade.

The risk of allowing the discount to widen is that it could lead to capital outflows or a shift in deposits to dollars from Saudi riyals, Monica Malik, the chief economist at Abu Dhabi Commercial Bank, wrote in a report on March 16.

While SAMA is unlikely to boost borrowing costs this week, it may raise its benchmark rates two more times in 2018, according to Malik.

Saibor has risen 28 basis points so far this year, compared with a 51 basis-point advance in Libor.

“The central bank could eliminate the remaining gap by selling government bonds in the open market to fine-tune Saibor within the interest rate corridor,” said Ziad Daoud, the chief Middle East economist for Bloomberg Economics.

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Goldman Bets on an Unprecedented Economic Overhaul in Saudi

SOURCE: Bloomberg

Time: March 15, 2018

Goldman Sachs Group Inc. is doubling down on its plans for Saudi Arabia in a bet that sweeping economic reforms will draw investors to the kingdom despite a turbulent corruption crackdown.

The U.S. lender, which has traditionally advised companies and governments on takeovers and fundraising efforts in the region, plans to deploy its own money in the kingdom for the first time, Wassim Younan, Goldman’s chief executive for the Middle East and North Africa, said in an interview in London. To help identify such opportunities, the bank is hiring veteran banker Ammar Al-Khudairy, who previously oversaw Morgan Stanley’s operations in the country, he said.

The bank’s expansion in the world’s largest oil exporter is good news for the kingdom’s Crown Prince Mohammed bin Salman, who’s trying to secure his grip on power without alienating the international investors he needs to transform the economy into a financial powerhouse. Other global banks have also proved to be unfazed by the tumultuous changes in Saudi Arabia as the prince, known as MBS, consolidates his authority with steps such the temporary detainment of senior princes and prominent businessmen starting in November.

Massive Transformation

“With the exception of China, I have not witnessed in my 34-year career in the business a sovereign undergoing such massive economic and social transformation,” Younan said. “We remain keen and continue to prospect for opportunities in the kingdom to deploy and invest the firm’s own capital alongside our clients.”

Al-Khudairy will take over in April as the non-executive chairman for Goldman in the country, subject to regulatory approval, and become regional adviser for the Middle East and North African markets. He’s also the founding partner and chairman of private equity firm Amwal Al Khaleej, according to his biography on Morgan Stanley’s website.

The banker will help to further bolster Goldman’s presence in the kingdom and make principal investments in the country, said Younan, who himself has been with the New York-based bank since 1992 and became a partner in 2004.

Saudi Arabia has embarked on a range of reforms to diversify its economy after a plunge in crude prices crippled the oil-rich nation’s finances. Those changes include a potential listing of Saudi Arabian Oil Co., the kingdom’s crown jewel, in the hope that it will attract more international investors to its bourse and boost capital-market activity. Goldman is among the major banks who are likely to be appointed to manage what’s likely to be the world’s largest IPO, people with knowledge of the matter said earlier this year.

Unfazed Banks

Other global investment banks are also bolstering their operations in Saudi Arabia to take advantage of business opportunities arising from the state’s plan for privatizations and investments in non-oil related sectors. Deutsche Bank AGhas said it’s expanding in the kingdom as the outlook for bond and stock sales improves, while Citigroup Inc. recently won its first local advisory mandate since returning to Saudi Arabia after a 13-year absence.

“We anticipate a meaningful pick-up in M&A and capital markets activity going forward,” Younan said, adding that the bank has doubled its Riyadh-based staffing in the last two years. His firm recently received approval to trade equities in the kingdom, and plans to start those operations at the end of the month.

Goldman hired Eyas AlDossari from HSBC Holdings Plc at the end of last year as head of its investment banking business for Saudi Arabia. It also poached Mohammed Al Awad from the British bank to head its equities business in the kingdom.

Saudi Deals

The bank is one of the firms chosen by Saudi Arabia to help arrange the sale of a dollar-denominated bond, people familiar with the matter said earlier this month, as the country prepares to borrow the equivalent of $31 billion this year to bridge an expected budget deficit and fund growth plans after its economy shrank last year. It advised Kingdom Holding on its Saudi Fransi stake purchase and is also advising Saudi British Bank on its merger talks with Alawwal Bank.

Among other deals, Saudi Arabian hospital operator Al Hammadi Co. for Development & Investment is close to hiring Goldman to advise on merger talks with National Medical Care Co., people familiar with the matter said in February. Jabal Omar Development Co. also hired Goldman Sachs to advise on a potential merger with Umm Al Qura Development, the company said in November.

“We constantly look at our staffing requirements in relation to the commercial activity,” Younan said. “Given what’s happening in the kingdom, that should give you a fair idea of which direction our staffing levels could be heading in future.”

— With assistance by Matthew Martin

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Saudi consumer spending set to take hit as reforms impact

Mar 2, 2018

New research says spending will be subdued to 2020 with expats, higher earners hit most

Overall consumer spending in Saudi Arabia is expected to take a hit over the next couple of years as a result of the economic reforms being implemented in the Gulf kingdom, according to new research.

Al Rajhi Capital has calculated in a new research note that consumer spending is likely to remain flat until 2020, increasing just 3.8 percent over the period to reach SR977 billion, with expat spending hit the hardest.

It said that without reforms, the total consumer spending would have grown by up to 9 percent in the same period, reaching SR1,025 billion.

The government has rolled out multiple reforms over the last few months such as VAT, an expat levy, electricity/gasoline price hikes, the Citizen Account program and a cost of living allowance.

Al Rajhi Capital said despite the expected fall in consumer spending, the majority of Saudi households would be shielded from the impact of the reforms.

“Our calculations suggest that 70 percent of Saudi households
are shielded from the impact of reforms during 2017-2020, primarily due to the support of Citizen Account program,” it said.

The kingdom’s Citizen’s Account program is intended to ease the impact of belt-tightening measures and is a part of Crown Prince Mohammed bin Salman’s Vision 2030 plan to move Saudi Arabia beyond oil.

“Further, the bottom 50 percent of Saudi households (by income level) will have net benefit from the Citizen Account program with cash support higher than the likely increase in household expenditure due to reforms.”

The research added that the additional benefit from cost of living allowance (applicable only for 2018) means that 90 percent of Saudi households will be shielded this year.

However, while Saudi household spending to remain healthy; non-Saudi household spending to shrink, the research said.

Supported by government programs, Saudi household spending is set to grow 8.2 percent over 2017-2020 to reach SR811 billion in 2020 but withh no support program for expat households, their spending will decline 13.5 percent over the same period to SR166 billion in 2020, Al Rajhi Capital added.

It also noted that high income Saudi households which account for up to 40 percent of total consumer spending by Saudis, will be most prone to consumer spending decline, as they receive no government support.

Transport (mainly purchase of vehicles), recreation and
culture (package holidays), furniture and furnishings, and restaurants will be some of the hardest hit sectors in the kingdom, the research said, adding that pressure on margins in the retail sector could lead to industry consolidation.

This article was first published in  Arabian Business

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Saudi Arabia announces largest budget in its history

Time: December 19 2017

King Salman bin Abdulaziz Al Saud, chaired the Saudi Cabinet’s session at Al-Yamamah Palace, on Tuesday, during which the State’s General Budget for the fiscal year 2018 was approved.

King Salman bin Abdulaziz Al Saud addressed the nation, announcing the budget, as the largest expenditure budget in the history of the Kingdom. The budget, he said, takes into account the lower oil price levels compared to previous years, and has been planned in order to continue development and enhancement process towards achieving the Kingdom’s Vision 2030, that aims at increasing the size of the national economy and sustain its growth, through diversification of the economic base, sources of income and the capacity to adapt to developments and for overcoming challenges.

The King said that dozens of programs have been launched to realize the goals of diversifying the economic base and empower the private sector to play a major role, in sustaining expenditure efficiency, in order to realize appropriate economic growth rates, mitigate the burden on the citizens and tackle possible impacts, in addition to supporting the private sector.

He hailed the achievements related to decreasing the deficit of the budget of the current fiscal year  to 8.9% of the GDP  from 12.8% during the last fiscal year. Despite increasing the expenditure in next year’s budget,  he added that the target is to decrease the deficit  to be less than 8% of the Gross Domestic Product, in spite of the great and expansionary volume of the budget.

The King stated that government programs have managed to downsize depending on oil to about 50%, adding that the development funds and the General Investments Fund take part in the capital and investment expenditure, with portions that exceeded capital expenditure volume, in the budgets of previous years, in addition to government keeping leading with capital expenditure, at an increase of 13%.

As a result, the government decided to invest these successes, expand development and adjust the fiscal balance program till the year 2023.

While maintaining fiscal policies, including the level of debt to GDP to remain below 30% with a level of deficit to be gradually decreased.

The king said “this budget continues to disburse on various development sectors in all regions of the Kingdom at high rates. It also includes allocations for housing, and a large expenditure of government funds that would contribute to push the economic wheel forward, and provide more employment opportunities for male and female citizens.”

The king announced that he directed “ministers and all officials to raise the level of performance, develop government services and enhance the efficiency of expenditure and transparency to meet the aspirations and the satisfaction of citizens for the services provided to them as well as to reflect the desired objectives of the allocated amounts in this budget, and the emphasis on continuing to fight corruption and maintain public money.

He emphasized that the budget takes into consideration the “continuation of work towards comprehensive and balanced development in all regions of the Kingdom, without any distinction.”

 

Following are the highlights of the Saudi Budget 2018:

• Approved 2018 Saudi budget: Expenditure 978 bln SAR, revenues 783 bln SAR, deficit 195 SAR

• Expected 2019 Saudi budget: Expenditure 1006 bln SAR, revenues 843 bln SAR, deficit 163 bln SAR

• Expected 2020 Saudi budget: expenditure 1050 bln SAR, revenues 909 bln SAR, deficit 141 bln SAR

• Expected 2021 Saudi budget: expenditure 1080 bln SAR, revenues 955 bln SAR, deficit 126 bln SAR

• Expected 2022 Saudi budget: expenditure 1107 bln SAR, revenues 1049 bln SAR, deficit 57 bln SAR

• Fiscal balance expected to be achieved in 2023 with expenditure of 1134 bln SAR, revenues 1138 bln SAR, surplus 4 bln SAR

• The 2018 state budget has the biggest expenditure of any adopted budget in the kingdom’s history, and it will be funded from the following sources: 50% from oil revenues, 30% from non-oil revenues, 12% from debt and 8% from government balances

• In 2018, tax on goods and services will generate around 85 bln SAR

• The budget allocates 2.5 billion riyals a month to the Citizens’ Account in 2018

• Public debt’s percentage compared to GDP will not exceed 25% during fiscal balance phase

• General reserves will not decrease below 250 bln SAR during financial balance phase

• Gradual increase of energy, water prices as expats’ levy continues to increase as previously announced

• General expenditure in 2018 to include general budget expenditure, expenditure of Public Investment Fund, other development funds

 

• Expenditure of Public Investment Fund, other development funds in 2018 to reach 133 bln SAR

• Total value of government’s capital expenditure is 338 bln SAR

• Funds’ capital expenditure to be spent on housing, energy, mining, industry, transportation, entertainment, communication, technology and small and medium-sized enterprises

• GDP decreased by 0.5% in 2017, to increase by 2.7% in 2018

• GDP of non-oil private sector increased by 1.5% in 2017, to increase by 3.7% in 2018

• Total value of stimulus packages for private sector are 200 bln SAR

• Capitals of Industrial Development Fund, Real Estate Development increased by 40 bln SAR in 2018

• 72 bln SAR will be spent on recent stimulus packages from 2017 until 2020

• Remaining 88 bln SAR are for future packages aimed at developing private sector, supporting local content

 

This article was first published Al Arabiya English
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