• NTP targets imply pressure on private sector; stay Underweight Saudi Arabia released its National Transformation Plan (NTP) yesterday, breaking down the goals from the Vision 2030 into hundreds of strategic objectives and numerical targets. Our first reading reaffirms our view that Saudi Arabian companies and consumers face a period of relative austerity over the next few years, and we stay Underweight on KSA equities. We still like retail and healthcare stocks that are plays on consolidation and efficient spending, as well as companies that are relatively ‘subsidy free’. KSA stocks may get a boost if MSCI chooses to put the market up for consultation at its 14 June annual review, but we expect this will be shortlived. We will provide more sector-specific analysis at a later date.
• 5% cut in wages by 2020 is a surprise headwind for consumers The NTP plans to cut total wages to SAR456bn by 2020 from 2015’s SAR480bn. We previously assumed that total take home pay for public employees would be cut as benefits were reduced, but had expected nominal growth in wages as we expected elevated levels of inflation (3.5% on average in 2016-18e) due to subsidy cuts. The wage target underlines a serious stance on fiscal retrenchment (partly in pursuit of a higher sovereign rating, another NTP goal), but it implies a challenging few years for consumers (80% of Saudi nationals work for the public sector). Meanwhile, the govt targets a public debt-to-GDP ratio of 30% in 2020, implying cUSD200bn in debt build-up according to our estimates. This debt will finance budget deficits – the implication is that investment relating to the Vision 2030 will be financed outside the budget. Planned additional non-oil revenues were confirmed at USD100bn.
• Subsidy cut now SAR200bn; few details, gas target looks achievable Energy and water subsidies are set to be slashed by SAR200bn (USD53bn) by 2020, according to the NTP. This is much higher than the USD30bn cited by Deputy Crown Prince Mohamed bin Salman in an earlier interview with Bloomberg. The reason for the difference between the two numbers remains unclear, especially since the NTP has so far offered little details about how and when the subsidy cuts will be rolled out. Other energy-related targets make sense in the context of rising energy efficiency. For example, the NTP calls for a c50% rise in gas output to 17.8bn cfd by 2020. This is consistent with the rise in gas production already expected this year, and also with plans to increase the use of gas in power generation (which could potentially free up 100s of thousands of barrels of crude a day for export).

Simon Kitchen
Mohamed Abu Basha
Yousef Husseini