Event

The cabinet of Saudi Arabia has agreed on the introduction of a VAT tax, showing the country’s willingness to develop alternative sources of public revenue on the back of lower oil prices. The tax is expected to be introduced from the beginning of 2018. Saudi Arabia is making significant further steps with the aim of diversifying its economy. Plans to float 5% of the shares of Saudi Arabia’s national oil company have become more concrete this month when Riyadh appointed its IPO advisor and its lead underwriters. The floating is expected in the second half of 2018. A further step is the concretisation of expected labour market reforms aimed at encouraging Saudi hiring in private companies, namely via a reward system for companies hiring Saudis and the introduction of charges for hiring expatriate workers. These reforms are expected to be implemented in 2017. To diversify its energy production, Saudi Arabia this month also announced the launch of the kingdom’s 9.5GW National Renewable Energy Programme (NREP) to be implemented by 2023.

Impact on country risk

In response to the low oil prices, Saudi Arabia has started a fundamental shift of its economy away from oil. This happened under the impulse of the deputy crown prince Mohammed bin Salman. He outlined in April 2016 the Vision 2030 plan. The aim is to create private-sector jobs for nationals, diversify the economy and implement fiscal discipline. Currently Saudi Arabia relies on oil for nearly 70% of its current account receipts and was thus hard hit by the sharp drop in oil prices. While Saudi Arabia was running a double-digit current-account-to-GDP surplus in 2012, this has become a deficit since 2016. GDP growth also decreased from 5.4% in 2012 to 1.2% in 2016. For 2017, the IMF reduced its growth estimates for the economy to 0.4% (previously 2%) in its January World Economic Outlook. The recent increase in oil prices (following OPEC members’ decision to cut production) is a positive sign for the Saudi economy. To fund its fiscal deficit and to diversify its funding, Saudi Arabia entered international debt markets for the first time in October 2016 and is planning a second bond emission. For the domestic labour market, the diversification strategy will be important in order to increase the number of private-sector jobs for Saudi nationals. Currently the government is the main employer for Saudi nationals. The aimed reduction in the size of the government thus has a profound effect on the Saudi labour market. Youth unemployment in particular is currently very high (28.5% in 2014). A key role in the Saudi Arabian diversification strategy will be played by the newly created sovereign wealth fund (SWF), the Public Investment Fund (PIF). This fund aims to invest both at home and abroad in order to diversify the kingdom’s economy. Currently it is estimated that the SWF already manages USD 160 bn in assets. The proceeds of the public floating of part of Aramco’s shares (estimated to be USD 100 bn) will be transferred to the fund and in time, full ownership of Aramco is also expected to be given to the SWF. This is expected to result in the PIF being one of the largest SWFs in the world. So while Saudi Arabia is well underway to implement significant reforms, the diversification of its economy will be a long and challenging process.

Analyst: Jan-Pieter Laleman, jp.laleman@credendo.com