Renewed macro pressure in the short term…
The gov’t is set to press ahead with the second phase of the fiscal consolidation in the next few months, raising fuel prices and implementing the Value-Added Tax (VAT); the latter will be the broadest-based amongst GCC countries, with authorities choosing to tax education and health services provided by the private sector, as well as local transportation. We expect both measures to bring inflation to a five-year high of 3.5% on average in 2018 (assuming only companies in aggregate would only partially pass on the cost to consumers), weighing on consumers’ sentiment and purchasing power. We note the impact of the measures will be mitigated partially by cash subsidies though quantifying the compensation remains unclear, especially for the VAT.
…as gov’t seeks to stimulate the economy
Mitigating the fiscal pressure and aiming to boost an economy that has been nearly grounded to a halt in the past couple of years, the gov’t is adhering to IMF’s advice of phasing out the fiscal reforms. The balanced budget target by 2020 has been now pushed by two years, and fuel subsidy cuts will be phased on a longer period (details still not yet available). Finance Minister, Al Jadaan, has recently told Bloomberg that the gov’t is planning an even more expansionary budget than initially sought, including a special stimulus package for the private sector. We note the IMF’s outlined scenario results on average in additional spending of 2% of non-oil GDP per annum than initially planned in the Fiscal Balance Programme. With this year’s budget already being expansionary (budgeting for 6% growth in expenditure) without much stimulating growth, we expect authorities to focus more on targeted packages rather than a blanket increase in spending.
2018 catalysts – Budget, privatisations and Saudisation
We still expect a generally subdued growth environment in 2018, with the expected stimulus likely balanced in view of planned fiscal measures. Nevertheless, we see three key drivers for the economy and markets next year: i) budget announcement expected in the last week of December, as we will be awaiting the details of the proposed stimulus package and its effectiveness in driving economic activity; ii) privatisation is another stimulus, as it will provide the state with additional funding to press ahead with various new spending initiatives; and iii) proceeding with further Saudisation bodes well for the economy, increasing Saudi employment and reducing remittances outflows, which have already declined 9% Y-o-Y in 9M17.