MUFG: Saudi Arabia diversification will be slow but steady

Ehsan Khoman, Head of Research and Strategist for MENA.

According to analysis from MUFG, Saudi Arabias recent moves spearheaded by HRH Crown Prince Mohammed bin Salman are moving Saudi Arabia in the right direction, with sectors from mining, metals, manufacturing, trade, tourism, hosptialith and finance, among others, that will see huge growth in the recently declared Emerging Market by MSCI, set to kick in next year.

“With over two years on, we continue to take comfort by the energy surrounding the Saudi Vision 2030 reform programme and view that there is much to be positive about in the long-term. Spearheaded by Crown Prince, Mohammed bin Salman (MbS), we see ongoing measures to relax the Kingdoms social code as evidence of a broader liberalising agenda. Having said that, such an aggressive reform programme is not possible without causing some challenges to the economy, and these difficulties will continue in the medium term,” said Ehsan Khoman, Head of Research and Strategist for MENA.

“Key sectors impacted by the announced reforms. The key directive of the Saudi governments Vision 2030 is to increase non-oil government revenues from SAR 163 billion to SAR 1 trillion by 2030. This will be achieved through various initiatives, most of which fall into the following categories: (i) revenue stream; (ii) subsidy reduction; and (iii) job creation. In short, sectoral gains thus far have been impressive and over the long-term are expected to be substantial. Eight sectors were outlined in Vision 2030 to drive growth. These are, mining and metals; petrochemicals; manufacturing; retail and wholesale trade; tourism and hospitality; finance; construction; and healthcare. Increases in trade, mining and tourism, have particular prominence in the programme to capitalise on what the country sees as the underutilised comparative advantage strengths that the nation enjoys as a result of its geographical position, substantial mineral resources and its position as host to the two most holy sites in Islam – Mecca and Medina. However, the reach of the programme is broader, seeking nothing less than a complete overhaul of the countrys economic base – a programme that involves the sale of state owned firms, changes to Saudi Arabias financial and labour markets, the restructuring of its government and widespread cuts to welfare and subsidy programmes,” Khoman continued.

Change will not come overnight, however.

“We continue to view that this time is genuinely different for the Kingdom and there is a strong basis, under the new leadership of MbS, that the country may be moving towards a period of meaningful structural change away from the reliance of hydrocarbons.However, we believe that diversification will be slow and will take years to deliver on the pledges set out in Vision 2030. It is likely that some of the delivery of reform may fall short of ambitious targets set. In the short-term, economic performance is likely to remain weak as mounting challenges remain as the slump in energy receipts is testing government finances. Also, whilst the ambition is evident, the biggest challenges will be implementation but it is clear that unlike in previous reform cycles during periods of low oil prices, this time appears different and the authorities have shown a stronger willingness to adjust policies in line with changing oil market dynamics. Key risks include the impact on vested interests and the large bureaucracy which could act as a dampener on timely reform implementation going forward. Indeed, slippage could occur due to execution risks or reform fatigue, particularly due to the socio-economic impact of fiscal consolidation. On the whole, unlike in previous years, the authorities have shown a willingness to adjust policies in line with changing oil market dynamics. These changes, which signal a recognition of the limits of the rentier state model, could usher a gradual move away from handouts to more of a sustainable growth model,” said Khoman.

Original Article

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