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Saudi Arabia Strategy - Royal decree a boost to consumer story, but negates fiscal measures

King orders boost to consumers income of more than SAR50bn in 2018


King Salman issued a royal decree to increase cash handouts for Saudi nationals in the public sector, after complaints that cash handouts by the Citizen Account fell short of covering rising living expenses after the implementation of fiscal measures (sharp rise in fuel and electricity prices and introduction of VAT) at the start of 2018. We believe this announcement will boost local sentiment, leading to a broad positive performance in the market (especially consumer names), at least in the ST. The decree includes the following benefits for state employees: i) restoration of the annual pay rise for 2018; ii) cost of living allowance of SAR1,000/month; iii) cost of living allowance for pensioners, as well as beneficiaries of the social security programme of SAR500/month; iv) a payment of SAR5,000 for military personnel serving on the southern borders; v) a 10% increase in stipend payments for Saudi students; and vi) exempting all citizens from VAT on private health and education services (will be paid instead by the state) as well as first-time home buyers. The payments are valid for only a year and are set to cost the state SAR50bn according to official estimates. We also note that various private sector companies have followed suit in providing its employees with cash handouts.
Clear upside to economic growth, but at the expense of fiscal discipline


The sizeable payment, which together with the Citizen Account provides consumers with SAR82bn, outweighs the fiscal measures planned for 2018 (estimated at SAR66bn) and thus is a major boost to consumer spending and overall economic activity in 2018.  We estimate it could add up to 0.5pp to real non-oil GDP growth in 2018. This comes on top of an overall expansionary budget focused on boosting investment spending. We note though this additional stimulus comes at the expense of fiscal discipline with the fiscal deficit only expected to marginally narrow (predominantly thanks to the expat levy). This policy stance confirms that authorities are likely to use any space created by the rise in oil prices to phase out/defer economic reforms. Indeed, the fiscal balance target of 2020 was recently postponed by three years and yesterday’s announcement raises questions regarding the newly set dates for a balanced budget.
Trading opportunity in listed retailers


Yesterday’s announcement improves 2018e earnings visibility for listed retailers and creates a short-term trading opportunity, in our view. We highlight eXtra (Buy, TP: SAR50), Farm Superstores (Buy, TP: SAR34), Herfy (Buy, TP: SAR73.6), Al Hokair (Buy, TP: SAR44), Jarir (Buy, TP: SAR184), Al Othaim (Buy, TP: SAR130), and SACO (uncovered). Our consumer team notes that monthly allowance payments (vs large one-off bonuses previously), amid a backdrop of consumer spending feeling pressure from VAT, higher fuel/electricity prices, etc., could provide greater support to smaller ticket items (Farm, Herfy, Al Hokair and Al Othaim). We have a Neutral stance on Saudi Arabia, due to its valuation (most expensive in MENA after Morocco) and our view is that while yesterday’s announcement is market positive, it raises questions yet again about the broader transformation momentum. Having said that, this decree, elevated oil prices, and upcoming index inclusion announcements momentum could be supportive in the ST. How far can the market go? The Saudi market is trading at c13.3x forward earnings (peak historical forward earnings is 16x, +20% from here). Our Neutral stance leaves us well exposed to the Saudi market given its weight in MENA benchmarks is c50-55% (depending on the index used). We have RJHI, SAMBA, YANSAB, TAWUNIYA, BUDGET, and AOTHAIM in our MENA Top 20 list. 

Mohamed Abu Basha
Mohamed Al Hajj