Saudi Arabia likely to introduce more reforms in H2: BofAML

Saudi Arabia remains committed to economic and fiscal reforms, with the next round of restructuring expected to come up in the second half of this year through energy pricing reforms, Bank of America Merrill Lynch (BofAML) said in a report on Monday.

Saudi government plans suggest steep increases to electricity, water and domestic energy prices over the H2 2017 period to 2020, possibly in two steps, the report said, while noting that fuel and utility prices in Saudi Arabia remain much below countries such as the United States.

“The government expects the cumulative inflation impact of these measures to 4.8 percentage points (ppt) to inflation. According to our reading of the Fiscal Balance Program 2020, we expect a cumulative 7 ppt impact from the changes,” Jean Michel-Saliba, MENA economist at BofAML, said in the report.

While the government has not yet decided on the reference prices to which domestic energy, water and electricity prices should be linked, authorities appear to be considering bringing energy product prices to their export price levels, Michel-Saliba said, adding that electricity and water prices could be brought up to cost recovery levels.

BofAML expects that the net proceeds of the reform will likely to be much smaller as the government intends to compensate households and the private sector for the impact.

Commenting on the recently announced hydrocarbon sector tax reform, BofAML said it is unlikely to lead to a major fiscal gap but this fiscal structure change may help Saudi Aramco achieve a higher equity valuation.

“We estimate ‎the reduction in the tax rate from 85 percent to 50 percent, alongside the listing of a 5 percent stake and the adoption of an offsetting (in relation to Aramco) dividend‎ policy may lead the government to only lose to minority shareholders 1.75 percent of Aramco's post-tax annual net income,” the report said.

The bank said it also expects large sovereign issuance of external debt to continue‎, supplemented by issuance from Saudi Aramco and the Ministry of Housing.

“We expect the government to resume issuing domestic debt over Q3-17, (and) then issue a conventional international bond of at least $15 billion in size in Q4-17,” the bank said.

The resumption of domestic issuance, however, is likely to modestly tighten domestic liquidity, it added.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com