Political stability and reforms to boost Saudi outlook

Dubai

Following a royal decree announced last month on the appointment of Prince Mohammad Bin Salman as the Saudi Arabia’s new Crown Prince has brought about more clarity on the direction Saudi Arabia’s political succession and the future of economic reforms.

The implied political stability and clarity in succession along with economic reform measures initiated by the kingdom is expected to boost investor perception and attract foreign investments into the country.

“This change will strengthen the mandate of Crown Prince Mohammad to implement the economic and social reforms as highlighted in Vision 2030. Private sentiment is encouraged by the change in succession as indicated by the jump in Saudi stock market index by 5.5 per cent following the announcement,” said Garbis Iradian, Chief Economist, Middle East and North Africa (Mena), Institute of International Finance.

Crown Prince Mohammed bin Salman is regarded as the catalyst for radical economic and social reforms in the Kingdom. He is the main driver of the National Transformation Programme (NTP) which identifies initiatives towards the attainment of objectives such as improving governance, balancing the budget, diversification, and increasing the role of the private sector in the economy.

As crude oil prices continued to decline this year, the Tadawul index has dropped, lagging behind an average of peers as measured by the MSCI Emerging Markets Index, which increased 17 per cent through June.

With the increased political certainty, analysts see the likelihood of implementing some of the bold reforms are now much higher. But in the near term the impact on the economy comes more from the persistent low prices and the need for further fiscal adjustment. Government outlays have been cut by cumulative of 16 per cent in the past two years, and further modest cuts are expected this year.

The kingdom is targeting incremental non-hydrocarbon revenues of 152 billion Saudi riyals (5.2 per cent of GDP) and gross savings from energy and water price reform of 171 billion riyals (5.9 per cent of GDP), together these are expected to ease the fiscal crunch the country is facing following prolonged low oil prices.

The flagship fiscal measures the government relies on are the introduction of a 5 per cent value added tax (VAT), excise and luxury taxes, as well as fees on expatriate dependents and levies on expatriate workers. The introduction of excise taxes is likely to bring in annual revenues of 8-10 billion riyals (about 0.35 per cent of GDP), according to government estimates. The VAT is budgeted to bring in $10 billion (1.4 per cent of GDP) in fiscal revenues.