Saudi Arabia pushes ahead with diversification agenda, pursues deals from tech to energy in US

SOURCE: The National

Time: April 01, 2018

Three weeks into a cross-country visit to the US, Saudi crown prince Mohammed bin Salman sealed a number of agreements from tech to energy aimed at overhauling the kingdom’s oil-dependent economy and beefing up the private sector.

A pact between Boeing and Saudi’s defence manufacturing company for a joint venture to develop the country’s nascent military industry was the latest accord reached during the visit. The venture, signed March 30 during the crown prince’s visit of the US planemaker’s facilities in Seattle, will localise more than half of the maintenance services for fixed and rotary-wing military jets in the kingdom, transfer technology and produce spare parts domestically. “It’s a great opportunity, Saudis have to move from simple manufacturing of food and perishable goods to something more high-tech,” said Mustafa Alani, senior advisor and director of security and defence at Gulf Research Centre. “We’ve put it on the shelf for so long.”

The crown prince held a flurry of meetings as part of his first official visit to the US since becoming heir to the throne last year. Beyond military deals, 36 memorandums of understanding worth $20 billion were signed at the Saudi-US CEO Forum. Deals included partnerships in sectors spanning healthcare, manufacturing, education and technology. During his visit the crown prince signed an MoU to build a $200bn solar power development, the world’s largest project, with Japan’s Softbank Group in New York.

Developing industries, including defense manufacturing, is part of the kingdom’s Vision 2030 transformation plan that seeks to diversify the economy beyond oil revenues, create jobs for young Saudis and expand the role of the private sector. It also features allowing greater participation of women in the workforce.

 

Building a home-grown military industry is one of the key goals of the kingdom’s economic reform plan. With that in mind, the country’s sovereign wealth fund established Saudi Arabian Military Industries, or SAMI, in May. It plans to manufacture equipment and provide MRO services. The ultimate goal is ambitious: Half of Saudi’s military procurement must be done locally by 2030, up from about two per cent currently. Saudi Arabia has earmarked $56bn for military spending this year, the biggest item on its budget.

SAMI’s target includes contributing $3.7bn to the Saudi economy by 2030, creating 40,000 jobs and investing $1.6bn in research and development, according to its website. The venture with Boeing is expected to generate revenues exceeding $22bn and create 6,000 jobs by 2030, according to a company statement.

It will likely take Saudi another five years to build a viable domestic military industry and up to 20 years to transfer knowledge and train a generation of engineers, according to security analysts.

Building a military industry from scratch means Saudi Arabia could potentially look to expand its market beyond local requirements.

“No doubt the decision behind indigenous defense industry is aimed at sale to regional neighbours and perhaps beyond,” Theodore Karasik, senior advisor to Washington-based Gulf State Analytics, said.

Saudi to join FTSE emerging index from next March, attract billions

SOURCE: Saudi Gazette

Time: April 01, 2018

 

DUBAI/NEW YORK (Reuters) – The Saudi Arabian stock market will join FTSE Russell’s emerging market index starting in March next year, the company said on Wednesday, a move expected to draw billions of dollars of fresh foreign portfolio investment to the kingdom.

Many equity funds around the world benchmark themselves against the index, and they will need to buy Saudi stocks when the change takes effect. With a capitalisation of about $500 billion, Saudi Arabia is the Arab world’s largest equity market.

The decision is a boost to reforms launched by Crown Prince Mohammed bin Salman, who wants foreign investment to create jobs and diversify the economy, which has been hit hard by low oil prices, beyond energy exports.

“Saudi Arabia’s inclusion in the FTSE benchmark is the largest event in the emerging markets since 2001, and an important development for global investors,” Mark Makepeace, chief executive of FTSE Russell, told a press conference in New York, referring to the expansion of FTSE’s coverage following its purchase of Barings Emerging Market Index the previous year.

To prevent Saudi Arabia’s large size from destabilising other markets as funds shift money to Riyadh, the kingdom will enter the index in several stages starting in March 2019 and ending in December 2019, FTSE said.

The kingdom is projected to have a weight of 2.7 percent in the index, which could rise to about 4.6 percent because of the government’s proposed public offer of 5 percent of the shares of state oil giant Saudi Aramco, FTSE added.

Saudi authorities worked for years to meet criteria to enter the index, tightening rules on corporate governance, modernising the market’s settlement system and easing – though not completely removing – restrictions on foreign ownership of stocks.

“This development will further diversify the investor base of the Saudi market, and a more diverse investor base often leads to a more mature and less volatile capital market,” Mohammed ElKuwaiz, the chairman of the Saudi Capital Market Authority, said at the New York event.

The FTSE decision would likely add almost $5.5 billion (£3.9 billion) of cash from “passive,” index-linked funds to the Saudi market, according to Makepeace.

Regional investment bank EFG Hermes has estimated Saudi Arabia will attract about $5 billion of “passive”, index-linked funds because of FTSE’s decision.

In addition, rival index firm MSCI will decide in June whether to include Saudi Arabia in its own emerging market benchmark. A positive decision, which many fund managers expect, could produce around $10 billion of passive inflows.

Such numbers may only be the tip of the iceberg; a lot more new money could come from “active” funds, which have more discretion to move between countries.

All told, Saudi Arabia could see a total of $30 billion to $45 billion of inflows in the next two years if it reaches the foreign ownership levels of markets in the neighbouring United Arab Emirates and Qatar, EFG Hermes thinks. Reaching the levels of Mexico and Russia would mean $90 billion of inflows.

“Saudi inclusion is a milestone event in the development of the region’s equity capital markets,” said Salah Shamma, head of regional equity investment at Franklin Templeton Investments, which manages some $745 billion of assets globally.

“It opens up the region to a dedicated investment pool otherwise unavailable.” Shamma added that the Saudi banking, insurance, healthcare, education and consumer staples sectors were potentially attractive.

Reforms may create new investment opportunities. A ban on women driving is to be lifted in a few months, which should aid auto-related sectors, and the kingdom plans to develop non-religious tourism for the first time.

ARAMCO

By increasing the presence of foreign portfolio investors in Saudi Arabia, entry into the FTSE and MSCI indexes may facilitate authorities’ plan to list shares in Aramco and reinvest the proceeds in new industries.

The government says it aims to sell about 5 percent of Aramco as soon as this year, listing it in Riyadh and possibly one or more foreign markets in what would probably be the world’s biggest IPO.

Prince Mohammed has predicted the sale will raise at least $100 billion. Many private analysts consider that too optimistic, but Riyadh’s market is still likely to need the participation of foreign investors to help absorb the huge IPO.

At present, foreign investors of all types own less 5 percent of Saudi Arabia’s market. Expectations for this ratio to rise have lifted the Saudi stock index over 9 percent this year.

Exchange data show foreigners have already begun buying more stocks, purchasing a net $1.64 billion year-to-date.

It is not clear, however, whether the market’s uptrend will continue in the coming months. The Saudi economy is still struggling with low oil prices, and at a valuation of over 16 times last year’s earnings, the market is not cheap compared to MSCI’s emerging market index at about 15.5 times.

Riyad Capital, a major Saudi investment bank, said in a report this week that the index had now hit its target for 2018 and while a further rise was possible, it might need triggers such as improvement in the corporate earnings outlook.

“We … would avoid jumping on the speculative bandwagon,” it said.

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SoftBank, Saudi Arabia Announce Massive Solar Power Project

SOURCE: The New York Times

Time: March 29, 2018

TOKYO — SoftBank Group Corp. Chief Executive Masayoshi Son announced Wednesday a $200 billion solar power project in Saudi Arabia, which he described as “the world’s biggest solar power generation.”

The project is in cooperation with the kingdom’s young and powerful Crown Prince Mohammed bin Salman, a partner in the SoftBank Vision Fund, set up in 2016. The fund has already invested in companies in the U.S., India and Europe.

The deal is the first major investment by the fund in Saudi Arabia. It was announced in New York after a Saudi-U.S. CEO forum held on the sidelines of the crown prince’s multi-day tour across the U.S.

The ample sunshine and land and Saudi Arabia’s pool of engineers and skilled workers make the foray into solar there lucrative, Son said.

He said the project will create 100,000 jobs, reduce Saudi Arabia’s dependence on oil for its electricity, which it can sell internationally instead, and will generate 200 gigawatts of electricity by 2030.

The kingdom, which is one of the world’s largest oil producers, estimates its local energy consumption will increase three-fold by 2030. To build up its renewable energy sector, the crown prince has outlined an initial target of generating 9.5 gigawatts of renewable energy in his “Vision 2030” plan, which is a blueprint of mostly economic targets aimed at creating more jobs for the country’s majority young population entering the workforce in the coming years and diversifying the economy away from its reliance on oil exports for revenue.

The solar panels for the project will be imported at first, but will later include a panel manufacturing and assembly site, according to Son. Construction on the project begins immediately, and electricity generation will start next year, he told reporters.

The announcement could boost confidence in the crown prince’s efforts to attract billions in foreign investment during his U.S. tour after the unprecedented arrest of hundreds of top figures in Saudi Arabia, including prices, business moguls and military officers last year. The purported anti-corruption sweep, which the prince oversaw, spooked many foreign investors concerned about transparency and predictability.

SoftBank, founded in 1981, has within its sprawling investment empire financial-technology, ride-booking services and the Pepper human-shaped companion robot.

The first telecoms carrier to offer the iPhone in Japan, SoftBank has bought British semiconductor company ARM and Japanese professional baseball team, the Softbank Hawks.

Son has been a critic of nuclear energy after the 2011 tsunami set off multiple meltdowns in Fukushima, northeastern Japan, the worst nuclear disaster since Chernobyl, and sees solar energy as a key part of his company strategy.

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Saudi bank pegs growth hopes on mortgages, women buying cars

SOURCE: Arabian Business

Time: March 29, 2018

Saudi Arabia’s second-biggest bank is betting that government efforts to develop the entertainment industry, boost home-ownership and open up the role of women in the economy will fuel growth this year.

The kingdom is undergoing an economic overhaul driven by Crown Prince Mohammed bin Salman that includes removing restrictions on cinemas, concerts and women driving and working.

It also plans to subsidise home loans to expand the private-sector’s role in funding mortgages as part of the transformation plan to diversify the economy away from oil and reduce the population’s reliance on state spending.

Al Rajhi Bank is also planning to expand its corporate-lending business on optimism that businesses will start borrowing again later this year, after loans to the private sector fell in 2017, CEO Steve Bertamini said in an interview.

Rising demand for corporate and housing loans should help Al Rajhi outperform peers in 2018, he said.

“Our goal is to outperform the industry,” Bertamini said. “Housing demand gives us confidence that we’ll be able to continue to do that, and if corporate demand begins to improve, especially if the government begins to fund some projects, we think that will be positive for the banks and also for us.”

Al Rajhi’s fourth-quarter profit was 2.45 billion riyals ($653 million), beating the highest analyst estimates as it boosted income from financing and investments.

Loan growth

The bank underwrote 44 percent of all new Saudi Arabian mortgages last year and growing the home finance business is its “number one objective for retail banking,” said Bertamini, 53, who joined Al Rajhi in 2015. Previously, he was CEO of consumer banking at Standard Chartered Plc.

With Saudi Arabia’s economy expected to return to growth this year, the government’s plan to boost spending should help drive demand for corporate loans, Bertamini said. Total bank loans across the industry fell 1.1 percent last year as the economy shrank.

Al Rajhi, which makes most of its profit from retail banking, wants to boost its market share in corporate banking by between half and one-percentage point a year. The bank’s share of corporate assets rose to 7.3 percent at the end of last year, according to the bank’s own figures.

To do that the bank is focusing on lending to industries that deal with a lot of customers, like retail, health care and education, where it can also benefit by offering ancillary services like installing point-of-sale machines, or providing payroll services.

Hiring women

Al Rajhi is also looking to double the size of its female workforce to about 20 percent by 2020, as the kingdom’s conservative society increasingly opens up to women. Saudi Arabia has said it will allow women to drive from June this year, ending a decades-long ban. In January, female fans attended official soccer matches for the first time, while more women-only gyms are opening, along with female-only car showrooms.

“Demand for autos by females should also be a driver of growth,” Bertamini said. “January saw depressed auto sales, but as women are allowed to drive and more women enter the workforce, I think you’ll see an uptake in demand for autos, and that will help household spending.”

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FTSE upgrades Saudi Arabia to emerging market status

SOURCE: The National

Time: March 29, 2018

Index compiler FTSE Russell upgraded Saudi Arabia to emerging market status on Wednesday, a move that is expected to pump billions of dollars of foreign investment into the Arab region’s biggest stock exchange, which has a market capitalisation of $500 billion.

The promotion, which is expected to be followed by a similar move from index compiler MSCI in June, comes as the kingdom opens up its stock market further to foreign investors and implements reforms to meet international norms. The FTSE upgrade is expected to attract up to $5bn of fund inflows from passive investors, who track indexes and do not pick stocks, analysts said.

“Saudi Arabia is to be congratulated on the pace of the recent market reforms which are widely acknowledged as being positive for the country and capital markets development in the region,” said FTSE chief executive Mark Makepeace.

Saudi Arabia, the world’s biggest oil exporter, is courting foreign investors as part of reforms aimed at lowering dependence on hydrocarbon income and creating new revenue streams in the wake of the 2014 oil price slump.

The reforms being undertaken are under the umbrella of Vision 2030, an overarching economic roadmap that was revealed in 2016 and is being implemented in phases.

“We have worked closely with index providers and the global investment community to ensure that our capital market reform programme sets the highest regulatory standards to meet the needs of both current and prospective investors,” said Mohammed El Kuwaiz, chairman of Saudi Arabia’s Capital Market Authority. “Saudi Arabia’s inclusion in global benchmarks will further strengthen our position as the largest market in the Middle East region and we will work closely with the market during the transition period.”

 

Saudi Arabia will have a weighting of 2.7 per cent in FTSE’s Emerging Market Index, making it the largest Middle East market in the benchmark. It will also have a 0.25 per cent weighting in FTSE’s Global All Cap Index.

FTSE, which will include the kingdom in its indexes in five tranches with listing fully completed by December 2019, said the proposed initial public offering of a 5 per cent stake in Saudi Aramco, the world’s biggest oil producer, on the local Tadawul stock exchange could boost its weighting in the emerging market index to 4.6 per cent.

Tadawul is up 8.7 per cent so far this year on expectation of the upgrades.

Egyptian investment bank EFG Hermes expects the top 10 stocks that include Al Rajhi, Saudi Arabia’s second-largest lender by assets, and Sabic, the region’s biggest petrochemical producer, to receive a big chunk of FTSE passive inflows.

Saudi Arabia implemented a slew of reforms to win its emerging market status.

In January, it made it easier for international investors to buy publicly-traded companies by halving the minimum requirement of qualified foreign investors to $500 million from $1bn. The kingdom also introduced short-selling last year and implemented the T+2 settlement, which means that securities settle two days after they are bought, in line with international norms.

“Year-to-date net foreign inflows [QFI and Swaps] totalled around 6.8bn riyals [Dh6.65bn] from 0.2bn riyals 2017 YTD) and thereby we expect significantly more inflows through both the MSCI and FTSE inclusions,” said Mazen Al Sudairi, head of research at Al Rajhi Capital in Riyadh. “Given that the inclusion is in tranches, we expect foreign investor flows to be sustained for an extended period.”

The FTSE’s action is expected to be followed by an upgrade in June from MSCI’s Emerging Markets Index, which is tracked by around $1.6 trillion in active and passively managed money.

“We expect Saudi Arabia’s inclusion into MSCI EM index will bring with it significant foreign investment,” said Bassel Khatoun, chief investment officer of MENA Equities at Franklin Templeton Investments (ME). “Saudi’s potential 5 per cent weight in the MSCI EM index may result in flows of around $80bn assuming benchmark weight or $40bn in equity flows excluding Saudi Aramco’s IPO.”

Meanwhile Kuwait, which was recognised as an emerging market last year by FTSE and will have a 0.4 per cent weighting in its index, will be listed in two tranches that will be complete by December this year. Kuwait, which was the best performing stock market in the Arabian Gulf last year, is expected to attract over $800m in inflows from FTSE trackers, EFG said.

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Saudi finance minister outlines ‘challenging and multidimensional’ strategy for change

SOURCE: Arab News
Time: March 28, 2018

NEW YORK: Saudi Finance Minister Mohammed Al-Jadaan told the Saudi-US CEO Forum on Tuesday that the strategy for transformation was “challenging and multi-dimensional” but that if achieved, it will help robust economic growth and improve living standards in the Kingdom.
Al-Jadaan was delivering the keynote address to a packed audience at the Gotham Hall in New York, where 200 chief executives and other senior business people had gathered.
“We are here to build upon the success and the program launched in Riyadh during the first foreign visit by US President Trump last year.
“Our path forward is challenging and multidimensional, but we have programs underway that can make it successful,” he said.
He said that the main strategies driving Vision 2030 were the National Transformation Program, the fiscal balance program, the national industrial development program and the financial sectors development program.
He told the Americans in the audience: “You believe in the promises and the opportunities Saudi Arabia will provide.”
Al-Jadaan underlined the government’s commitment to reduce budget deficits and eliminate them completely by 2023. He added that the aim was to increase non-oil gross domestic product (GDP) by 3 percent per year, and that this would be helped by the changing import policy and by new bankruptcy laws.
On the possible initial public offering of Saudi Aramco, he said: “There is no decision on a listing yet, but what is sure is that we’ll list on the local market, the Tadawul.”
The forum had been welcomed by Lubna Olayan, CEO of the Olayan group and co-chair of the forum, who told the gathering that the economic diversification plan had a broad strategic vision.
“We all know about defense, security and hydrocarbons, but we want to go way beyond that,” she said.
The strategy was to accelerate growth through public-private partnerships, women’s empowerment, new sectors of the economy and the “giga projects” such as Neom and the Red Sea Resort.
“This cannot be achieved without the support of strong partners. The US-Saudi relationship goes back to the foundation of the Kingdom, and Saudis see the US as a source of knowledge that we can bring back home. Many of our youth are trained here in the US, and our youth are an even greater resource than our oil,” she added.
Andrew Liveris, the CEO of Dow Chemical Company and the other co-chair of the forum, said the reform program underway in the Kingdom was “profound and game-changing.”

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OPEC, Russia consider 10- to 20-year oil alliance – Saudi Crown Prince

SOURCE: Reuters

Time: March 27, 2018

NEW YORK (Reuters) – Saudi Arabia and Russia are working on a historic long-term pact that could extend controls over world crude supplies by major exporters for many years.

Saudi Crown Prince Mohammed bin Salman told Reuters that Riyadh and Moscow were considering a deal to greatly extend a short-term alliance on oil curbs that began in January 2017 after a crash in crude prices.

“We are working to shift from a year-to-year agreement to a 10 to 20 year agreement,” the crown prince told Reuters in an interview in New York late on Monday.

“We have agreement on the big picture, but not yet on the detail.”

Russia, not a member of the Organization of the Petroleum Exporting Countries, has worked alongside the 14-member group during previous oil gluts, but a 10 to 20 year deal between the two would be unprecedented.

Top OPEC producer Saudi Arabia recruited Russia and other non-OPEC countries to help drain oversupply when oil prices collapsed to below $30 a barrel in 2016 from over $100 in 2014.

Crude has since recovered to $70 but fast-rising output from U.S. shale producers has capped prices.

“This is all about whether the arrangement is a short-term expedient to deal with this particular crisis in the oil market, or whether it reflects a realignment in world oil,” said oil historian Daniel Yergin, vice chairman at consultancy IHS Markit.

Saudi Arabia’s Crown Prince Mohammed Bin Salman attends the Annual Horse Race ceremony, in Riyadh, Saudi Arabia, December 30, 2017. Bandar Algaloud/Courtesy of Saudi Royal Court/Handout via REUTERS

“OPEC countries want to find a way to institutionalize this relationship rather than to have it be a one-shot deal.”

Robert McNally at consultancy Rapidan Energy Group said Riyadh wanted help in breaking the boom-bust cycles that characterize oil markets by capping crude on the upside as well as by helping lift low oil prices.

“History shows that without a long-term, powerful, competent coherent, disciplined swing producer in the oil markets … you get space-mountain oil prices. Wild volatility of the sort we have seen in the past 10 to 15 years and that Saudi Arabia and Russia do not want to see again,” McNally said.

He said that would require Russia to join Saudi in building spare production capacity to use when prices rise too much.

SAUDI, RUSSIA ALLIANCE “THICKER THAN OIL”

A long-term pact between Moscow and Riyadh would effectively co-opt Russia to the Saudi-led OPEC cartel while strengthening Russia’s hand in the Middle East where the United States has long been the dominant super-power.

News of the potential oil alliance came at a time when the two have been working to cement an economic relationship despite being at odds over the conflict in Syria, where they back opposing sides.

Riyadh supports rebels fighting Syrian President Bashar al-Assad’s army, while Russian and Iranian forces have backed Assad – meaning that Russia effectively sides with Iran, Riyadh’s regional arch-foe.

A meeting between the Saudi crown prince and Russian president Vladimir Putin on the sidelines of a G20 meeting in China in September 2016 was instrumental in bringing Russia on board to support OPEC, non-OPEC oil curbs.

Last October, Saudi King Salman became the first Saudi monarch to visit Russia, providing investment and political support for a Russian economy battered by Western sanctions.

The Russian flag and the OPEC logo are seen before a news conference in Vienna, Austria, October 24, 2016. REUTERS/Leonhard Foeger

“It is a very important strategic development,” Helima Croft at RBC Capital Markets said of a potential 10 to 20 year Saudi-Russia oil collaboration.

“First, the Crown Prince is making the statement, not the oil minister, one more clear sign that he (like Putin) is the final word on his country’s oil policy.

“Second it is one more sign of the major reversal in Saudi-Russia relations. Saudi was a staunch cold war ally of the U.S. Now this Russia-Saudi alliance appears to be thicker than oil and seems to be driven by the personal affinity between Putin and MBS,” said Croft.

ARAMCO IPO LATE 2018, EARLY 2019

The crown prince predicted that world oil demand would not peak until 2040, despite advances in renewable energy technologies and the electric vehicle.

In an attempt to end Saudi Arabia’s reliance on oil, he is leading a push to diversify the Saudi economy away from oil and gas by 2030.

Riyadh plans to raise funds through the flotation of a 5 percent stake in state Saudi oil company Aramco. Time is running out for an initial public offering this year but the crown prince said the IPO could still take place at the end of 2018 or in early 2019, depending on financial market conditions.

Saudi Oil Minister Khalid al-Falih said last week that documentation was ready but that a venue for the IPO had not yet been decided. The New York stock exchange is still in the running for the IPO, alongside London and Hong Kong, but Falih said there was a risk of a “frivolous” legal action if Aramco were listed in the United States.

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IMF chief praises Saudi economic reforms

SOURCE: Arabian Business

Time: March 25, 2018

Saudi Arabia is making “good progress” in its economic reforms, according to International Monetary Fund (IMF) managing director Christine Lagarde.

Following a meeting with Saudi Crown Prince Mohammed bin Salman in Washington DC, Lagarde said that Saudi authorities are making “good progress in implementing their ambitious reform agenda including through the recent introduction of the VAT [value-added taxes] 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,” she added. “The IMF expects real GDP growth to pick-up this year.”

In November, an IMF report predicted that real GDP growth in Saud Arabia will strengthen from 2018 after a projected growth of 0.1 percent in 2017.

Jihad Azour, the IMF’s director for the Middle East and Central Asia, said that the Saudi Economy will be given a boost by its decision to allow women to drive, which will create more jobs and opportunities.

“Allowing women to participate further in the economy will provide additional output,” he said.

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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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