EUR 134.16 For Business Accounts Only

Saudi macro | Initiating coverage at a crossroads

Expect early signs of recovery to show in 2018. We forecast real GDP growth at 1.8% and 2.3% in 2018 and 2019, respectively, relative to 0.5% in the last two years. Favourable oil price dynamics should push oil-GDP growth to 1% this year from -3% in 2017, despite the OPEC output cuts. Higher oil proceeds, cash support for Saudi nationals, a pick-up in investment activity, and improved sentiment should also drive non-oil GDP growth to 2.4% in 2018 up from 1% last year. Consolidation has lowered the fiscal breakeven oil price to USD77/bbl in the 2018 budget from USD79/bbl last year. The recent corruption purge and social liberalisation are wins for Crown Prince Mohammad Bin Salman, but geopolitical risks and reform fatigue could also derail growth plans ahead.

Investment and sectoral reforms are key themes. We see that investment activity is marked for 7% growth in 2018-2019 vs. -6% since 2015, driven by legislative reforms, the streamlining of business procedures, privatisation, an SME initiative, PIF empowerment, and capital market reforms. These reforms can also potentially trigger an upgrade this June by MSCI to EM. Today’s higher oil price should drive the government to settle past dues to the private sector, reinstating activity and spending, in our view.  

Consumption growth will lag. Government support initiatives were timely, but will merely ease the shock to consumption in 2018, in our view. The combined cash support for various initiatives, including the Citizens Account Program, adds just 4% in private consumption activity this year, relative to the average 6% growth since 2014, if we account for income cannibalisation from the VAT, utility price hikes, expat fees, and inflation peaking to 4.2% this year. Nitaqat/Saudisation are positive in the long-term, but will continue to induce labour outflow and contract the consumer base, at least until 2020. 

SAMA on the right track. Liquidity dynamics are reassuring, thanks to the issuance of USD66bn in external debt, as of 2016, as well as recovering oil exports. SAMA’s reserve assets remain strong, at 2.7x its annual import bill, as of 2017. We expect SAMA will continue adjusting its monetary tools to balance liquidity, maintain the peg, and minimise capital flight. This, in our view, will be achieved by: i) raising rates at least twice this year, alongside anticipated FED moves, ii) balancing government deposits in the banking sector, and iii) amending L/D ratio.