Saudi Arabia’s economic transformation will be “unstoppable” and there has already been a positive shift in the Kingdom’s business culture, according to a top executive of American financial giant Bank of America Merrill Lynch.
Hootan Yazhari, managing director of the bank’s Dubai-based research department, said there are key moves being made to boost accountability in Kingdom.
“On the ground, you can see the change. It’s palpable. There is a change in attitude and culture toward accountability. The process of change in the Kingdom is like turning an oil tanker round — when it happens it will be unstoppable.”
Yazhari was speaking as the bank unveiled its latest report into Saudi Arabia’s investment outlook, finances and economy, completed just after the launch of the anti-corruption drive by the government. The bank said the campaign against corruption in the country “may dampen near-term sentiment but is likely to provide further impetus to ensuring success of reforms and stable energy policy.”
The anti-corruption drive was a key issue for the progress of the government’s National Transformation Program (NTP) 2020 to privatize large parts of the Kingdom’s corporate structure, Yazhari said. “The uncertainty relates to the scope of the investigations under way now. Our understanding is that it is limited to individuals, and does not include corporates.
“Depending on how this plays out, we see Saudi Arabia as an exciting opportunity. Next year could see twin indexation events — with Saudi Arabia admitted to the FTSE and the MSCI — and then it will be a market that investors have to be involved in,” he added.
The bank said that a delay in implementing the NTP goals “would allow more time for ministries to meet their targets.” The bank said that the ultimate value of the non-oil privatization program — put at $200 billion by the Saudi economy ministry — would depend on a detailed analysis of financial performance of the assets to be sold, adding that there could be “sizeable budgetary savings from a successful privatization program.”
Jean-Michel Saliba, chief economist and strategist for the Middle East and North Africa, said the upcoming Saudi budget could see the government “loosen the purse strings” further after a period of comparative fiscal austerity.
“Higher oil prices support government efforts to lengthen the timeline for fiscal consolidation. Still, they may breed complacency and have brought uncertainty on the pace of reforms going forward,” he said.
Saliba said that the recent suggestion from the Saudi Ministry of Finance that the target date of 2020 to reach fiscal balance could be pushed back to 2023 “is in line with our view that the government wants to achieve an uneasy balance between austerity and activity, and try to support growth.”
“Accelerated fiscal reform could put the economy in recession for the next couple of years,” Yazhari said.
The bank said there had been “mixed progress” on the program to achieve fiscal balance so far, with “cascading delays” to reforms like the scrapping of fuel and energy subsidies, originally scheduled for this year, due to a “weak economy and the seasonal summer energy consumption peak.”
Saliba added that with oil at current levels — Brent stood at $61.70 a barrel yesterday — the government would have much more room with the budget. The bank’s calculations and forecasts were made on the assumption of $50 per barrel, and it said it was unlikely that Brent would average more than $65 per barrel until 2020, but could peak cyclically at $75. On Saudi Aramco, officially due to be privatized by the end of next year in an initial public offering (IPO) that could be worth as much as $100 billion, the bank said that an international sale — either through IPO or private placement — would be necessary to secure inflows of foreign exchange reserves.
The Tadawul stock market in Riyadh has said it could stage the whole IPO domestically.
Regarding a venue for the IPO, Bank of America said that the Justice Against Sponsors of Terrorism Act (JASTA), considered an obstacle by many analysts to a listing on the New York Stock Exchange, “in its current form may not bear material influence on decision-making.”