## _cr16326 ## Source details **Canonical URL:** [_cr16326](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16326.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16326.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16326.pdf.json) --- ### 1. Supply and Demand of Bank Credit in Saudi Arabia: Challenges and Opportunities - Context and recent macro-financial developments - Vision 2030 and the National Transformation Program (NTP): 178 strategic objectives with over 340 targets and benchmarks for 24 ministries and government entities to be achieved by 2020. - Government deposits at SAMA: about $280 billion. - SAMA net reserves: $609 billion (32 months of imports). - Government debt: around 5 percent of GDP. - SAMA’s NFA have fallen by $154 billion since December 2014. - Real GDP growth: 3.5 percent in 2015; non-oil growth: 3.1 percent in 2015. - Non-oil public sector GDP: contracted by close to 9 percent (y/y) in 2015Q4. - Oil sector growth: 4 percent in 2015 (2.1 percent in 2014); oil production around 10.2 mb/d in Jan–May 2016. - Total employment increased by 3.8 percent in 2015; employment of Saudis increased by 1 percent; employment of Saudis in the private sector fell by over 1 percent. - Unemployment rate of nationals: 11.5 percent; female unemployment: 33.8 percent. - Fiscal deficit: 15.9 percent of GDP in 2015 (from 3.4 percent in 2014); oil revenue dropped 51 percent between 2014 and 2015. - Current account: deficit of 8.3 percent of GDP in 2015. - Deposit growth declined by 2 percent (y/y) in April 2016. - Private sector credit growth: 10 percent (y/y); credit to construction sector: 27 percent (y/y) in 2016Q1. - SAMA relaxed loan-to-deposit ratio in February 2016; SAMA increased reverse repo rate by 25bp to 0.5 percent in December. - Major credit ratings: Fitch (AA-), S&P (A-), Moody’s (A1). - Outlook and projections (selected) - 2016: Real GDP growth expected to slow to 1.2 percent; oil output growth projected to slow to 0.6 percent (oil production assumed to average 10.2 mb/d); non-oil growth projected at 1.6 percent. - 2017: Real GDP growth expected to recover to 2 percent. - Fiscal deficit projected to narrow to 13 percent of GDP in 2016 under the baseline. - Expected additional revenues from policy changes: 1.3 percent of GDP (higher energy and water prices) and 1.6 percent of GDP (increased transfers from public entities). - Baseline projection: fiscal deficit declines to 7.7 percent of GDP in 2021; government net financial asset position: +38 percent of GDP in 2015 → -17 percent of GDP in 2021. - Current account deficit projected to narrow to 6.4 percent of GDP in 2016 and move close to balance by 2021. - Inflation expected at a little over 4 percent in 2016; eases in 2017, picks up in 2018 with VAT introduction, then eases to 2 percent in 2019–21. ### Box 1 — Empirical findings: supply and demand of bank credit - Model and purpose - Fixed effects panel model of bank-level real credit growth estimated using bank-specific and macro variables; model 7 highlighted for predictions. - Bank credit identified as a key transmission channel from oil prices to the real economy. - Supply-side determinants (empirical results) - Credit supply improves with higher capital ratios (positive and significant). - Credit supply improves with stronger deposit growth (positive and significant). - Credit supply weakens as banks increase provisioning for NPLs (negative and significant). - Increases in excess liquidity in the banking system boost credit extension. - Bank credit growth declines as banks increase holdings of government bonds (evidence of “crowding-out”). - Expansion of lending by Specialized Credit Institutions (SCIs) associated with weaker bank credit growth in segments where SCIs operate (suggesting competition). - Demand-side determinants (empirical results) - Demand for credit increases with higher oil prices. - Demand for credit increases with stronger non-oil private sector activity. - Financial deepening (bank credit to private sector as a share of non-oil GDP) helps unlock credit demand. - Model predictions and historical behavior - Model 7 helps explain robust credit growth in 2015 despite sharp drop in oil prices: supported by strong bank balance sheets and economic activity even as deposit growth slowed. - Historical decompositions highlight roles for non-oil GDP growth, deposit growth, provisioning growth, and capital ratios. ### Policy implications and recommendations related to bank credit - Maintain strong bank balance sheets - Capital ratios are a key positive determinant of credit supply; banks need to maintain sufficient capital under low oil prices. - Prudential provisioning - Provisioning for NPLs reduces credit extension but is essential for safeguarding financial stability. - Liquidity and deposits - Greater confidence in the banking system helps attract customer deposits and support credit supply. - Excess liquidity expansion supports lending; deposit growth remains critical. - Fiscal policy and market structure - Fiscal adjustment and reduced reliance on banks to finance budget deficits could support private sector credit by reducing bank holdings of government bonds and crowding-out. - Policymakers should consider complementarities and competition between SCIs and banks given evidence SCIs do not expand bank credit in the same segments. ### Key risks to the outlook - Global oil market uncertainties: futures and consensus forecasts show risks skewed to the upside, but excess capacity and downside risks to global growth could still cause further price drops. - More volatile global financial markets: could constrain external financing, pressuring reserves, domestic liquidity, and credit. - Reform implementation risks: failure to implement fiscal adjustment may raise near-term growth but increase debt, interest rates, and exchange rate pressures; overly rapid fiscal consolidation would hurt near-term growth. - Regional security risks: escalation could hurt confidence and growth. --- ### 16. Economic developments in Saudi Arabia and regional spillovers - Channels of spillover to GCC/MENA: imports, remittances, tourism, aid, and financial flows. - Countries with strong Saudi ties—particularly Bahrain—likely to be among the most affected by Saudi slowdown. - Risk Assessment Matrix (selected entries) - Persistently low energy prices (Likelihood/Time Horizon: High/Medium-term; Expected impact: High) - Quantified scenario: A 10 percent permanent decline in oil prices would reduce fiscal and external balances by 2.3 and 2.8 percentage points of GDP, respectively, assuming no policy response. GDP growth would drop by 0.5 percentage points a year assuming the government fully offsets revenue losses with expenditure cuts. - Policy response: Fiscal adjustment; intensify diversification; ensure banking liquidity and monitor banks. - Government does not implement fiscal adjustment plans (Likelihood/Time Horizon: Low/Medium-term; Expected impact: High) - Impact: Net debt rises rapidly, borrowing costs increase, crowding-out risks rise, pressures on the peg increase. - Policy response: Adhere to fiscal consolidation objectives; strengthen budgetary processes. - Private sector employment opportunities do not increase fast enough (Likelihood/Time Horizon: Medium/Medium-term; Expected impact: High) - Policy response: Further labor market reforms to increase employment of Saudi nationals in the private sector. - Tighter or more volatile global financial conditions (Likelihood/Time Horizon: Medium/Short-term; Expected impact: High) - Policy response: Rely on strong fundamentals and large financial cushions to mitigate impact. - Note: RAM probability labels: “low” <10 percent, “medium” between 10 and 30 percent, “high” between 30 and 50 percent. ### Outlook for the global oil market and role of Saudi Arabia (Box 2) - Market context and projections - IEA June 2016: global oil demand growth 1.3 mb/d in 2016 and 2017. - Non-OPEC supply: decline by 0.9 mb/d in 2016; pick up by 0.3 mb/d in 2017. - Excess supply estimated at 0.9 mb/d in 2016; stocks high and will take time to clear. - Three supply-cut scenarios analyzed (to eliminate 0.9 mb/d excess supply) 1. Saudi Arabia cuts all 0.9 mb/d alone. 2. Saudi Arabia cuts 0.4 mb/d and other OPEC producers jointly cut 0.4 mb/d. 3. Saudi Arabia, other OPEC, and non-OPEC each cut one third of the excess. - Price and fiscal impacts (price elasticity assumptions: -0.2, -0.1, -0.05) - Impact on oil prices: 5% to 18% increase depending on elasticity and scenario. - Impact on Saudi fiscal balance (percent of GDP), selected: - Only Saudi cuts: impact on fiscal balance -1%, 0%, 1% (across elasticity assumptions). - All OPEC cut: -0.1%, 0.5%, 1.8%. - OPEC + Non-OPEC: 0.1%, 0.8%, 2.0%. - Caveat: Saudi oil revenue could be negligible or negative if Saudi absorbs all the output cut; positive in most shared-cut scenarios. - Table 1 (selected projections, mb/d) - Global demand: 2014: 92.8; 2015: 94.7; 2016: 96.1; 2017: 97.4 - Global supply: 2014: 93.7; 2015: 96.4; 2016: 96.9; 2017: 97.6 - Non-OPEC (includes NGLs): 2014: 56.2; 2015: 57.7; 2016: 56.8; 2017: 57.0 - Crude Saudi Arabia: 2014: 9.7; 2015: 10.2; 2016: 10.2; 2017: 10.3 - Crude Other OPEC: 2014: 21.3; 2015: 21.9; 2016: 23.1; 2017: 23.2 ### Spillovers from Saudi to GCC/MENA (Box 3) — channels and vulnerabilities - Imports channel - Share of MENA in Saudi imports: about 10 percent. - More than 50 percent of Saudi Arabia’s imports from MENA come from UAE, Egypt, Bahrain, and Oman. - Bahrain and Egypt, and to a lesser degree Oman, will be affected most by Saudi import slowdown; UAE marginally affected (Saudi imports from UAE <5 percent of UAE’s non-oil exports). - Remittances channel - Total remittances from Saudi Arabia estimated at $38 billion in 2015. - Egypt, Yemen, Lebanon, Jordan and Syria receive about 90 percent of Saudi remittances to MENA. - Remittances to MENA represent about 30 percent of total Saudi remittances. - Tourism/travel channel - Saudi tourist arrivals into Bahrain represent more than 50 percent of Bahrain’s total tourist arrivals. - Saudi outbound travel outside MENA is about 10 percent of total Saudi travels. - Jordan could be significantly affected if coupled with remittance declines. - Other channels - Aid reductions could affect Egypt, Sudan, Lebanon, and Yemen. - High Saudi government borrowing may lead to repatriation/lower FDI or portfolio investments, potentially affecting Bahrain and UAE. - Empirical evidence - A slowdown in Saudi non-oil growth by 1 percentage point would reduce non-oil growth in Bahrain by 0.8 -1 percentage point. - Saudi growth appears to affect Oman; influence on other GCC economies appears statistically insignificant in some samples. --- ### Vision 2030 and National Transformation Program — selected targets (Box 4) - Labor markets - Unemployment reduced from 11.6 percent currently to 7 percent (9 percent by 2020). - Women’s participation increased from 22 percent currently to 30 percent (28 percent by 2020). - Create 450,000 jobs in nongovernment sector by 2020. - Reduce civil service workforce by 20 percent by 2020. - Trade and fiscal - Increase share of non-oil exports to 50 percent of total from current 16 percent. - Non-oil revenue: SR163 billion in 2015 → SR1 trillion by 2030 (SR530 billion by 2020). - Achieve balanced budget (target). - Private sector and FDI - Increase private sector share to 65 percent of GDP from 40 percent currently. - SME contribution: 20 percent → 35 percent of GDP. - Increase FDI share of GDP from 3.8 percent to 5.7 percent. - Sectoral and governance targets (selected) - Increase Umrah pilgrims from abroad from 6 to 30 million per year (15 million by 2020). - Aramco IPO of up to 5 percent equity stake; government estimates value of Aramco at over $2 trillion. - PIF assets: SR600 billion currently → SR7 trillion by 2030. - All targets are for 2030 unless otherwise stated. --- ### Fiscal consolidation, baseline and adjustment scenarios (selected quantitative results) - Baseline scenario (Overall balance, Percent of GDP, selected years) - 2014: -3.4; 2015: -15.9; 2016: -13.0; 2017: -9.6; 2018: -8.8; 2019: -7.0; 2020: -6.3; 2021: -7.7 - Adjustment scenario (Overall balance, Percent of GDP, selected years) - 2014: -3.4; 2015: -15.9; 2016: -13.0; 2017: -8.8; 2018: -5.3; 2019: -2.2; 2020: -0.3; 2021: 0.0 - Selected fiscal-financial balances (Baseline vs Adjustment, Percent of GDP) - Net government financial assets (Baseline): 48.4 38.3 25.1 13.6 3.7 -3.6 -9.9 -17.3 (2014–21 series excerpt) - Net government financial assets (Adjustment): 48.4 38.3 25.1 13.9 7.3 4.5 3.7 3.4 - Central Bank gross reserves (months of imports) (Baseline): 35.4 32.3 27.9 24.4 21.4 18.8 16.6 14.7 - Central Bank gross reserves (months of imports) (Adjustment): 35.4 32.3 28.1 25.2 23.4 22.3 21.9 22.3 - Credit to private sector (percentage change) - Baseline: 11.8 9.2 6.0 5.3 5.9 5.9 5.3 5.2 (2014–21 excerpt) - Adjustment: 11.8 9.2 6.0 5.8 6.5 6.9 8.6 8.6 - Real GDP growth (percent) - Baseline: 3.6 3.5 1.2 2.0 2.6 2.6 2.3 2.3 - Adjustment: 3.6 3.5 1.2 1.3 1.3 1.5 1.5 1.7 ### Fiscal adjustment composition (SAR billion, 2016–2021 entries where shown) - Baseline reforms (SAR billion by year) - Energy price reform (baseline): 28 29 29 30 30 30 - Fees, fines, and tax collection improvement: 6 11 17 22 28 - VAT: 35 53 56 59 - Excise tax: 6 5 5 5 5 - Total (baseline): 28 40 94 85 92 100 - Additional reforms (adjustment scenario) (SAR billion) - Energy price reform (additional): 35 78 125 168 208 - Wage control: 1 15 19 25 36 - Household compensation: -22 -31 -43 -55 -65 - Capital spending control: 5 34 42 51 60 - Other: -3 -5 -5 -3 14 - Total (additional): 1/ 16 91 138 187 253 - Grand total (baseline and adjustment): 28 56 185 223 279 352 - Memo: Annual savings from additional reforms as percent of GDP: 0.6 2.6 1.5 1.5 1.8 ### Energy and water price reforms (Box 5) — outcomes and estimates - December 2015 price increases across energy and water products: expected to generate revenues of SR 28 billion ($7.5 billion) for Aramco in 2016 and reflected as higher government revenues. - Staff estimate of gradual increases to international/cost recovery levels over 5 years: - Gross revenue gains by end-2021: SR 314 billion or about 10 percent of GDP. - Net revenue impact after compensation estimated at about 5 percent of GDP in 2021. - Selected domestic price changes (Old -> New; Change) - Gasoline 95 octane: 0.16 -> 0.24, 50% - Natural Gas Ethane: 0.75 -> 1.75, 134% - Jet A-1: 0.07 -> 0.15, 120% - JP-8: 0.07 -> 0.16, 120% - Diesel Transportation: 0.07 -> 0.12, 80% - Revenue gains from energy price reform by 2021 (US$ billion and SR) - In US$ billion: 2016 = 7.5; 2017-2021 = 83.8 - Gross revenue gains (SR): 28.3 ; 314.3 - Net revenue gains (SR): 28.3 ; 144.3 - Breakdown (SR): Household wealth sharing (per capita) 37.1; Social protection 28.3; Non-households mitigating measures 104.6 --- ### Public investment management and fiscal framework - National Project Management Office (NPMO) established to improve project management standards. - Performance management program and KPIs introduced; to be monitored by performance management agency. - Priorities for fiscal framework reform: - Develop a medium-term fiscal framework; strengthen annual budget process; increase transparency and accountability. - Consider a formal fiscal rule to support accumulation of buffers during high oil-price periods. - Review public expenditure management to avoid deferred payments to contractors. - Fiscal transparency and public entities: - Move to GFSM2014 format for 2016 fiscal data welcomed; further fiscal transparency needed. - PIF and Aramco operations should be better integrated into fiscal framework and made more transparent. - Asset-liability management and debt issuance - $10 billion international loan finalized in 2016; sovereign bond may be issued later in year. - Debt Management Office (DMO) being set up; staff urged quick operationalization and a medium-term debt management strategy. - Domestic bond issuance expanding beyond fixed-rate instruments to floating rate notes and murabaha. - External position and exchange rate peg - External position weakened substantially in 2015. - Staff view: as long as credible fiscal adjustment in place, the exchange rate peg remains the best option. - Reserve metrics at end-2015: 32 months of imports; 129 percent of broad money; 700 percent of Fund’s reserve metric. --- ### Financial sector conditions and resilience - Banking sector - NPLs expected to rise from a low level of 1.2 percent. - Rapid credit growth to construction sector: 8 percent of bank credit. - Three-month SIBOR risen above 2 percent; spreads to U.S. LIBOR widened. - At current drawdown pace, bank excess liquidity will be depleted within 2 to 3 quarters. - LCR is high; banks have strong capital buffers. - Macroprudential and regulatory actions - Make National Financial Stability Committee operational; consider SCIs in macroprudential deliberations. - CCB framework introduced. - SAMA relaxed loan-to-deposit ratio to 90 percent (from 85 percent). - Implemented Basel III risk-based capital regulations; aggregate large exposure limit of 400 percent of capital introduced. - Single borrower exposure limits to be reduced from 25 percent of capital to 15 percent by 2019. - Capital surcharges for D-SIBs introduced in 2016. - Deposit insurance introduced to protect deposits up to SAR 200,000; draft bank resolution framework under discussion. - Correspondent banking and de-risking: SAMA actively convening banks and foreign regulators to clarify requirements. --- ### APPENDIX IV — Resilience of Saudi banks: stress scenarios (selected quantitative outcomes) - Asset-quality scenarios (three scenarios) - Scenario I: Oil prices decline from $50 in 2015 to $43 in 2016; recover to $56 in 2020. Nonoil private sector GDP growth: 3.4 percent (2015) → 2.1 percent (2016) → 4 percent (2020). Provisioning: 120 percent of new NPLs. - Aggregate NPL ratio: 3.9 percent by 2020. - Aggregate capital ratio: remains above 18 percent. - Provisions: maintain above 130 percent of total NPLs. - Scenario II: Oil prices fall to $32 in 2016; recover to $36 in 2020. Nonoil private sector GDP growth negative in 2016, recover to 1.5 percent in 2020. Provisioning: 100 percent of new NPLs. - NPL ratio: rises to 10 percent by 2020. - Provisions cover about 1.1 times stock of NPLs in 2020. - Aggregate capital ratio: around 14 percent. - Five banks’ capital ratios decline below 12 percent but remain above 8 percent; resources to restore to 12 percent: 0.2 percent of GDP (about SAR 5 billion). - Scenario III: Determine growth slowdown to reduce average capital ratio to 12 percent by 2020. - Non-oil private sector GDP growth would need to contract by about 4 percent in 2016 and 1 percent in 2017 before recovering to 1.5 percent in 2020. - NPL ratio: about 14 percent in 2020. - Capital ratios fall below 12 percent for 7 banks (4 banks remain above 8 percent). - Resources to restore to 12 percent: 0.8 percent of GDP (about SAR 22 billion). - Liquidity scenarios (30-day window) - Scenario A (milder): demand deposits decline 2 percent per period, time deposits 1 percent per period, average decline 8 percent over 30 days. - 10 percent of liquid assets encumbered; 95 percent of remaining liquid assets available for sale per 5-day period. - Haircuts: 1 percent for liquid assets; 15 percent for illiquid assets. - Result: no liquidity shortfall for banking sector or any individual bank. - Scenario B (faster run): deposits decline >10 percent over 30 days. - 85 percent of liquid assets and 1 percent of illiquid assets available; encumbrance: 20 percent (liquid) and 50 percent (illiquid). - Haircuts: 5 percent (liquid) and 30 percent (illiquid). - Result: aggregate system remains liquid; four banks suffer liquidity shortages by 1-3 percent of initial assets (banks # 4, 8, 10, 12). - Conclusion: Simulation results suggest Saudi banks can generally withstand higher NPLs and lower profits under the considered scenarios; liquidity pressures concentrated in a few banks under severe runs. --- ### Appendix I — Corporate sector: balance sheets, stress tests, and vulnerabilities - Listed corporate net income shrank by 25 percent in 2015. - Petrochemical net income fell by 37 percent in 2015. - Sample: 119 listed companies. - Cash balances exceeded short-term debt by $1.5 billion in 2015 (aggregate sample). - Total debt in sample: $116 billion in 2015 (18 percent of GDP). - “Debt at risk” (ICR < 1.5): about $36 billion in 2015; petrochemicals account for about 72 percent of total debt at risk. - Debt at risk to total debt: 31 percent in 2015 (up from 17 percent in 2014). - Earnings and interest coverage - Median ICR for all sample firms: about 10. - Median ICR for 30 largest firms: about 5. - Stress-testing scenarios (three) - Scenario 1: 70 basis point increase in borrowing costs and 16 percent decrease in earnings (changes from 2014 to 2015). - Scenario 2: 150 basis point increase in borrowing costs and 20 percent decrease in earnings. - Scenario 3: 300 basis point increase in borrowing costs and 38 percent decrease in earnings (extreme). - Outcomes: median ICR drops but remains above 2 under all scenarios; about half of total debt will be at risk under scenarios, concentrated in petrochemicals, telecommunications and multi-investment sectors. - Corporate bond issuance and rollover - Over 70 percent of total corporate bond issuance since 2003 concentrated in petrochemicals, utilities, real estate, and food. - Petrochemical and real estate companies have approximately $8 billion principal repayments due over next five years. --- ### External position, reserves, REER, and exchange rate considerations - Exchange rate and REER/NEER - Riyal pegged to U.S. dollar at 3.75 since 1986. - REER appreciated nearly 18 percent since July 2014; NEER appreciated 12 percent since July 2014. - REER is 22 percent above its long-run average. - External sustainability (selected assumptions and estimates) - Proven oil reserves end-2015: 258 billion barrels. - Annuity real per capita current account norm: 6.5 percent of GDP; annuity real current account norm: 0.5 percent of GDP. - Actual current account balance in 2015: -8.3 percent of GDP. - Current account gaps (external sustainability): -14.8 percent (annuity real per capita) and -8.8 percent (annuity real). - EBA-lite current account norm for 2015: 1.5 percent of GDP; current account gap (EBA-lite): -9.8 percent of GDP. - Policy gap identified by EBA-lite: -7.4 percent of GDP. - Foreign assets, liabilities, and reserves - Net external assets at end-2015: 109 percent of GDP (external assets: 154 percent; external liabilities: 45 percent). - Net external assets declined by 12 percent of GDP during 2015. - Reserves at end-2015: $609 billion (94 percent of GDP; 32 months of imports; 700 percent of IMF reserve metric). - Reserves fell by $115 billion during 2015. - Impact of a 10 percent depreciation (2016 estimates, GDP = 2,424 SR billion) - Trade balance effects (semi-elasticities used): - Using import volume elasticity -0.09 and non-oil export volume elasticity 0.67: 10 percent depreciation improves goods and services balance by 0.6 percentage points of GDP. - Using import volume elasticity -0.24: improvement of 1.1 percentage points of GDP. - Fiscal scenarios (SR billion) - Baseline (no depreciation): Revenue Total: 551; Oil revenue: 343; Nonoil revenue: 208; Expenditure Total: 865; Fiscal Balance: -314; Balance/GDP: -13.0 - Scenario 1 (10% depreciation, no change in nominal expenditure): Revenue Total: 588; Oil revenue: 377; Nonoil revenue: 210; Expenditure Total: 865; Fiscal Balance: -278; Balance/GDP: -11.4; improvement ~1.5 percent of GDP. - Scenario 2 (10% depreciation, nominal expenditures rise with 50% pass-through): Revenue Total: 588; Expenditure Total: 905; Fiscal Balance: -317; Balance/GDP: -13.1; fiscal balance worsens by 0.1 percentage points vs baseline. - Staff conclusion: depreciation likely has small impact on current account given limited substitutability and high imported content of domestic production. - Staff recommended policy responses - Substantial and sustained fiscal consolidation necessary to strengthen current account and support peg. - Medium-term fiscal consolidation plan based on energy price reforms, non-oil revenue measures, and expenditure compression. - Strengthen fiscal framework and close large fiscal gap to eliminate much of the current account gap. --- ### Labor market, VAT, excises, and statistical issues - Labor market challenges and recommendations - Fiscal consolidation reduces public sector job availability; priority to increase private sector employment and improve skills. - Policies: set expectations about public sector job availability; reduce wage gap between Saudis and expatriates; improve transportation, telework, childcare to boost female participation. - Nitaqat reforms: staff cautioned on complexity and cost; suggested simpler phased mechanisms (fees or visa limits). - VAT and excises (timing and design) - Excise taxes on tobacco and sugary drinks planned in 2017. - VAT planned for January 2018 at an initial GCC-agreed rate of 5 percent; turnover threshold $1 million. - Staff estimate revenue impact of excises and VAT at about SAR 40 billion. - Statistical gaps and data adequacy (as of mid-2016) - Data broadly adequate for surveillance but shortcomings in labor markets, government finance statistics, monetary and financial statistics and external sector statistics. - National accounts rebased to 2010; wholesale price index weight reference period outdated (1988). - No official real estate price series; no official breakdown of employment public vs private; lack of private/public wage data. - Monetary data improved; work ongoing to adopt SRFs and extend coverage to other financial corporations. - Quarterly IIP published but highly aggregated; BOP errors and omissions remain large. - Fiscal data moving to GFSM2014; 2016 fiscal data prepared in GFSM2014 format. - Recommended administrative and institutional steps - Finalize GCC VAT agreement; start administrative preparations. - Continue IMF TA on fiscal framework, VAT, and excises. - Announce objective to subscribe to SDDS as soon as possible. --- ### Staff appraisal — overarching assessment - Oil price decline affecting economy: non-oil activity slowing; equity prices and corporate profits fallen. - Real GDP growth expected to moderate to 1.2 percent in 2016 (from 3.5 percent in 2015), recovering to 2.3–2.6 percent over medium-term under baseline. - Fiscal and current account balances moved into large deficits; bank deposits declining while credit growth remained strong. - Fiscal and financial buffers built over past decade have cushioned impact and provided time for response. - Vision 2030 and NTP represent a fundamental shift; staff urge clear prioritization, sequencing, and implementation to limit reform fatigue. - Increasing private sector role, privatization and PPPs, FDI, SME support, and capital markets development identified as key to diversification. --- *Source: IMF staff report content in document _cr16326.* ### 1. Supply and Demand of Bank Credit in Saudi Arabia: Challenges and Opportunities ____________ 8 ### 1. Supply and Demand of Bank Credit in Saudi Arabia: Challenges and Opportunities ### Context and recent macro-financial developments - Policy shift and reform agenda - Vision 2030 and the National Transformation Program (NTP) set out 178 strategic objectives with over 340 targets and benchmarks for 24 ministries and government entities to be achieved by 2020. - Cabinet reshuffle and ministry restructurings to support reforms. - Policy buffers and external position (end-2015) - Government deposits at SAMA: about $280 billion. - SAMA net reserves: $609 billion (32 months of imports). - Government debt: around 5 percent of GDP. - Government also holds large shareholdings in domestic companies. - SAMA’s NFA have fallen by $154 billion since December 2014. - Real sector and labor market (2015 and early 2016) - Real GDP growth: 3.5 percent in 2015. - Non-oil growth: 3.1 percent in 2015 (down from 4.8 percent in 2014). - Non-oil public sector GDP: contracted by close to 9 percent (y/y) in 2015Q4. - Oil sector growth: 4 percent in 2015 (2.1 percent in 2014). - Oil production remained at around 10.2 mb/d in the first five months of 2016. - Total employment increased by 3.8 percent in 2015; employment of Saudis increased by 1 percent; employment of Saudis in the private sector fell by over 1 percent. - Unemployment rate of nationals: 11.5 percent; female unemployment: 33.8 percent. - Fiscal and external balances (2014–15) - Fiscal deficit widened to 15.9 percent of GDP in 2015 (from 3.4 percent of GDP in 2014). - Drop in oil revenue: 51 percent between 2014 and 2015. - Current account moved into a deficit of 8.3 percent of GDP in 2015. - SAMA Governor reiterated commitment to the peg amid forward-market pressure. - Banking sector and liquidity (2015–2016) - Deposit growth declined by 2 percent (y/y) in April 2016 as households and businesses reduced demand deposits. - Private sector credit growth: 10 percent (y/y); credit to construction sector: 27 percent (y/y) in 2016Q1. - Banks reduced holdings of SAMA bills, excess deposits at SAMA, and foreign assets; purchased government bonds. - SAMA relaxed the loan-to-deposit ratio in February 2016. - SIBOR rose substantially; spread to U.S. rates widened. - SAMA increased its reverse repo rate by 25bp to 0.5 percent in December. - Major credit rating agencies: Fitch (AA-), S&P (A-), Moody’s (A1). ### Outlook and projections - Growth - 2016: Real GDP growth expected to slow to 1.2 percent. - 2016: Oil output growth projected to slow to 0.6 percent (oil production assumed to average 10.2 mb/d). - 2016: Non-oil growth projected at 1.6 percent. - 2017: Real GDP growth expected to recover to 2 percent. - Baseline notes: private non-oil growth projected to weaken toward the end of the projection period due to rising government debt increasing the risk premium and crowding-out credit growth. - Fiscal trajectory and financing - Fiscal deficit projected to narrow to 13 percent of GDP in 2016 under the baseline. - Energy and water price increases introduced in late 2015: ranging from 10-134 percent. - Expected additional revenues: 1.3 percent of GDP (from higher energy and water prices) and 1.6 percent of GDP (increased transfers from public entities). - Baseline projection: fiscal deficit declines to 7.7 percent of GDP in 2021, driven by higher oil revenues (about 3 percent of GDP) and higher non-oil revenues (about 1 percent of GDP, mainly VAT and higher excise taxes), partly offset by lower transfers from public entities and gradual reduction in capital spending. - Government net financial asset position: +38 percent of GDP in 2015 → -17 percent of GDP in 2021. - Financing mix for projected deficits: deposit drawdown, domestic and international borrowing, and limited privatization proceeds considered in staff calculations. - External sector and reserves - Current account deficit projected to narrow to 6.4 percent of GDP in 2016 and move close to balance by 2021 as oil prices rise. - Financial outflows expected to slow as banks and pension funds reverse foreign investments and buy domestic government debt; government borrows externally. - SAMA’s NFA expected to fall substantially further in 2016, with a slower pace of decline over the medium term. - Inflation - Expected at a little over 4 percent in 2016 (sharp increase in January from higher energy prices). - Eases in 2017, picks up in 2018 with the introduction of the VAT, then eases to 2 percent in 2019–21. ### Box 1 — Empirical findings: supply and demand of bank credit - Overview - Bank credit is a key transmission channel from oil prices to the real economy. - A fixed effects panel model of bank-level real credit growth is estimated using bank-specific and macro variables (model variants; model 7 highlighted for predictions). - Supply-side determinants (empirical results) - Credit supply improves with higher capital ratios (positive and significant). - Credit supply improves with stronger deposit growth (positive and significant). - Credit supply weakens as banks increase provisioning for NPLs (negative and significant). - Increases in excess liquidity in the banking system boost credit extension. - Bank credit growth declines as banks increase holdings of government bonds (evidence of “crowding-out”). - Expansion of lending by specialized credit institutions (SCIs) is associated with weaker bank credit growth in segments where SCIs operate (suggesting competition rather than complementarity). - Demand-side determinants (empirical results) - Demand for credit increases with higher oil prices (positive coefficients). - Demand for credit increases with stronger activity in the non-oil private sector. - Financial deepening, proxied by bank credit to private sector as a share of non-oil GDP, helps unlock demand for credit. - Model predictions and historical behavior - Using model 7, predicted credit growth helps explain why credit growth remained robust in 2015 despite the sharp drop in oil prices. - Credit growth in 2015 was supported by strong bank balance sheets and economic activity even as deposit growth slowed. - Contributions to changes in credit growth (historical decompositions) show roles for non-oil GDP growth, deposit growth, provisioning growth, and capital ratios. ### Implications and policy recommendations related to bank credit - Maintain strong bank balance sheets - Banks need to maintain sufficient capital even as low oil prices put balance sheets under pressure. - Capital ratios are a key positive determinant of credit supply. - Prudential provisioning - Provisioning for NPLs reduces credit extension but is essential for safeguarding financial stability. - Liquidity and deposits - Greater confidence in the banking system helps attract customer deposits and support credit supply. - Excess liquidity expansion supports lending; deposit growth remains critical. - Fiscal policy and market structure - Fiscal adjustment and a reduced reliance on banks to finance the budget deficit could support credit to the private sector (reducing crowding-out from government bond holdings by banks). - Greater lending by SCIs does not increase bank credit in the same segments; policymakers should consider complementarities and competition between SCIs and banks. ### Key risks to the outlook - Global oil market uncertainties - Futures and consensus forecasts show risks skewed to the upside, but excess capacity and downside risks to global growth could still cause further price drops. - More volatile global financial market conditions - Could constrain external financing, pressuring reserves, domestic liquidity, and credit. - Reform implementation risks - Quick, prioritized implementation of NTP reforms could boost growth; failure to implement fiscal adjustment may raise near-term growth but at the cost of higher debt, interest rates, and exchange rate pressures; overly rapid fiscal consolidation would hurt near-term growth. - Regional security risks - Escalation of regional tensions or domestic security concerns could hurt confidence and growth. *Source: IMF staff report content in “1. Supply and Demand of Bank Credit in Saudi Arabia: Challenges and Opportunities.”* ### 16. Economic developments in Saudi Arabia have an important impact on the other GCC ### _cr16326 - 16. Economic developments in Saudi Arabia have an important impact on the other GCC ### Overview and regional spillover channels - Economic developments in Saudi Arabia affect other GCC countries and the broader MENA region through: imports, remittances, tourism, aid, and financial flows. - As growth slows in Saudi Arabia in the referenced year, countries with strong ties to Saudi Arabia—particularly Bahrain—are likely to be among the most affected. ### Risk Assessment Matrix — main risks, likelihood, impacts, and policy responses - Persistently low energy prices, triggered by supply factors reversing only gradually - Likelihood/Time Horizon: High/Medium-term - Expected impact: High - Quantified scenario: A 10 percent permanent decline in oil prices would reduce fiscal and external balances by 2.3 and 2.8 percentage points of GDP, respectively, assuming no policy response. GDP growth would drop by 0.5 percentage points a year assuming the government fully offsets the revenue losses with expenditure cuts. - Additional risks: adverse confidence effects and drying up of banking liquidity could reduce credit availability and amplify negative spillovers. - Policy response: Fiscal policy adjustment to reflect lower oil prices; intensify diversification efforts; ensure adequate banking system liquidity and monitor banks for signs of stress. - Government does not implement fiscal adjustment plans - Likelihood/Time Horizon: Low/Medium-term - Expected impact: High - Impact description: If announced fiscal adjustment in the 2016 budget does not materialize, net debt will rise rapidly, borrowing costs will increase, crowding-out risks will rise, and pressures on the exchange rate peg will increase. - Policy response: Ensure fiscal consolidation objectives are adhered to; strengthen budgetary processes. - Private sector employment opportunities do not increase fast enough - Likelihood/Time Horizon: Medium/Medium-term - Expected impact: High - Impact description: Absorbing new labor market entrants into government jobs is not an option given fiscal consolidation; unemployment will rise unless private sector hiring increases. - Policy response: Further labor market reforms to increase employment of Saudi nationals in the private sector. - Heightened risk of fragmentation/security dislocation in parts of the Middle East, Africa, and Europe leading to a sharp rise in migrant flows - Likelihood/Time Horizon: High/Short-term - Expected impact: Low - Impact description: Could raise oil prices if supply threatened; potential offset from falls in confidence, investment, and higher defense spending. - Policy response: Higher oil prices would ease fiscal pressure but fiscal adjustment still needed; consider temporarily slowing fiscal adjustment if growth is significantly affected by loss of confidence. - Tighter or more volatile global financial conditions: Sharp asset price adjustment and decompression of credit spreads - Likelihood/Time Horizon: Medium/Short-term - Expected impact: High - Impact description: Could affect government's ability to borrow internationally, increase domestic financing needs, and raise bank funding costs. - Policy response: Continued strong fundamentals and large financial cushions to mitigate impact. - Surge in the U.S. dollar - Likelihood/Time Horizon: Low - Expected impact: Short-term Low - Impact description: Dollar strength would appreciate the riyal given the peg; minimal impact on growth or current account due to small non-hydrocarbon exports. - Policy response: Banks should prove resilient; open FX positions largely in U.S. dollars and subject to prudential limits. (Note: the RAM’s probability labels: “low” <10 percent, “medium” between 10 and 30 percent, “high” between 30 and 50 percent.) ### Outlook for the global oil market and the potential role of Saudi Arabia (Box 2) - Market context and projections - IEA June 2016 monthly report expects global oil demand to grow by 1.3mb/d in 2016 and 2017. - Non-OPEC supply expected to decline by 0.9 mb/d in 2016 and pick up by 0.3 mb/d in 2017. - In OPEC, higher production in Iran and Iraq has more than offset production difficulties in Nigeria. - Excess supply is declining but stocks are high and will take time to clear; considerable uncertainties remain. - Three supply-cut scenarios analyzed (to eliminate estimated excess supply of 0.9 mb/d in 2016): 1. Saudi Arabia cuts all 0.9 mb/d alone. 2. Saudi Arabia cuts 0.4 mb/d and other OPEC producers jointly cut 0.4 mb/d. 3. Saudi Arabia, other OPEC, and non-OPEC each cut one third of the excess supply. - Price and fiscal impacts under different price elasticity assumptions (Table 2 summary) - Price elasticity of demand values considered: -0.2, -0.1, -0.05. - Impact on oil prices: 5% to 18% increase depending on elasticity and scenario. - Impact on Saudi fiscal balance in percent of GDP (selected entries reported): - Only Saudi cuts production: impact on fiscal balance -1%, 0%, 1% (across elasticity assumptions). - All OPEC cut production: impact on fiscal balance -0.1%, 0.5%, 1.8%. - OPEC + Non-OPEC: impact on fiscal balance 0.1%, 0.8%, 2.0%. - Caveat: Impact on Saudi oil revenues could be negligible or negative if Saudi absorbs all the output cut; positive in most scenarios if cuts are shared. - Table 1 (selected projections in mb/d) - Global demand: 2014: 92.8; 2015: 94.7; 2016: 96.1; 2017: 97.4 - Global supply: 2014: 93.7; 2015: 96.4; 2016: 96.9; 2017: 97.6 - Non-OPEC (includes NGLs): 2014: 56.2; 2015: 57.7; 2016: 56.8; 2017: 57.0 - US: 2014: 12.0; 2015: 12.9; 2016: 12.5; 2017: 12.5 - Russia: 2014: 10.9; 2015: 11.1; 2016: 11.2; 2017: 11.1 - OPEC: 2014: 37.5; 2015: 38.7; 2016: 40.2; 2017: 40.6 - NGLs: 2014: 6.5; 2015: 6.7; 2016: 6.9; 2017: 7.0 - Crude Saudi Arabia: 2014: 9.7; 2015: 10.2; 2016: 10.2; 2017: 10.3 - Crude Other OPEC: 2014: 21.3; 2015: 21.9; 2016: 23.1; 2017: 23.2 ### Spillovers from Saudi Arabia to GCC/MENA (Box 3) — channels and country vulnerabilities - Imports channel - Most Saudi imports come from outside MENA; more than 50 percent of Saudi Arabia’s imports from MENA come from 4 countries: UAE, Egypt, Bahrain, and Oman. - Bahrain and Egypt, and to a lesser degree Oman, will be affected most by a slowdown of Saudi imports. - Impact on UAE is marginal as Saudi Arabia’s imports from UAE represent less than 5 percent of UAE’s non-oil exports. - Share of MENA in Saudi imports is about 10 percent, so stronger impact felt by countries outside MENA. - Remittances channel - Total remittances from Saudi Arabia were estimated at $38 billion in 2015. - Five countries (Egypt, Yemen, Lebanon, Jordan and Syria) receive about 90 percent of Saudi Arabia’s remittances outflows to MENA. - Potential impact: Yemen and Egypt, and to a lesser but still significant degree Jordan and Syria, would be most affected if remittances decline. - Note: remittances to MENA represent only about 30 percent of total Saudi remittances; any impact will also propagate to countries beyond MENA, mostly in Asia. - Tourism/travel channel - Bahrain will be by far the most affected in the region: Saudi Arabia tourist arrivals into Bahrain represent more than 50 percent of Bahrain’s total tourist arrivals. - Saudi outbound travel to outside MENA is only about 10 percent of total Saudi travels. Jordan could also be significantly affected, particularly if coupled with a decline in remittances. - Uncertainty: extent to which Saudi travel to Bahrain would be affected by Saudi economic slowdown is unclear due to proximity and close ties. - Other channels - Aid: A decline could affect Egypt, Sudan, Lebanon, and Yemen which have received significant support from Saudi Arabia. - Financial channel: High Saudi government borrowing may lead to repatriation/lower FDI or portfolio investments, potentially affecting Bahrain and UAE where financial sectors have higher exposure to Saudi Arabia. - Empirical evidence (preliminary regression analysis) - A slowdown in Saudi non-oil growth by 1 percentage point would reduce non-oil growth in Bahrain by 0.8 -1 percentage point. - Saudi growth appears to affect growth in Oman, though sensitivity to sample period noted. - Saudi Arabia’s non-oil growth influence on other GCC economies appears statistically insignificant (possible sample size/period issues). ### Policy discussions (Vision 2030 context) — priorities and staff recommendations - Four main discussion themes 1. Prioritization, sequencing, and implementation of reforms. 2. Growth and employment in a low-oil price environment. 3. Fiscal adjustment, reforms, and financing. 4. Maintaining external and financial sector stability. - Authorities’ stance - Authorities committed to reforms in Vision 2030 to transform the economy over 15 years: diversify growth, reduce dependence on oil, increase private sector role, and create more jobs for nationals. - Reforms already undertaken: reduce government spending, adjust energy prices, introduce key performance indicators for ministries, strengthen public investment management. - Cabinet reshuffle and ministry restructuring aimed to streamline decision-making and improve accountability. - IMF staff advice and emphasis - Staff welcomed acceleration of reforms and noted consistency with prior IMF advice. - Staff stressed importance of clearly laying out policy measures, prioritizing and sequencing reforms, and avoiding implementation bottlenecks and reform fatigue. - Given fiscal consolidation’s short-term negative effects on growth and employment, staff recommended growth-enhancing structural reforms to offset this effect where possible. - Suggested initial focus on structural reforms improving product and financial market functioning rather than those raising labor costs. - Authorities are prioritizing reforms that can provide short-term growth dividends and strengthening inter-ministry coordination and civil service capacity. - Authorities’ view on growth projections - Authorities considered staff’s 2016 growth projections too pessimistic; they expected expansions in petrochemical, utility, and mining industries and increased visitors to Mecca and Medina to boost non-oil growth, and believed fiscal consolidation impact would be limited given composition of adjustment and scope for spending efficiency gains. - Agreement that longer-term non-oil growth will depend on reforms boosting productivity, private investment, and labor force participation. ### Vision 2030 and National Transformation Program — selected economic and sector targets (Box 4) - Labor markets - Unemployment reduced from 11.6 percent currently to 7 percent (9 percent by 2020). - Women’s participation in workforce increased from 22 percent currently to 30 percent (28 percent by 2020). - Create 450,000 jobs in nongovernment sector by 2020. - Reduce civil service workforce by 20 percent by 2020. - Trade and fiscal - Share of non-oil exports to be increased to 50 percent of total from current 16 percent. - Non-oil revenue to be increased from SR163 billion in 2015 to SR1 trillion by 2030 (SR530 billion by 2020). - Reduce wages and salaries as share of budget spending. - Achieve balanced budget. - Subsidy reform - Subsidies to be removed; direct cash payments to low and middle income households who rely on subsidies. - Private and SME sectors; FDI - Increase private sector share to 65 percent of GDP from 40 percent currently; SME sector contribution to be raised from 20 percent of GDP to 35 percent. - Increase FDI share of GDP from 3.8 percent to 5.7 percent of GDP. - Sectoral objectives/targets - Tourism: liberalize tourist visa regime; plans to build world’s biggest Islamic museum; increase number of Umrah pilgrims from abroad from 6 to 30 million per year (15 million by 2020). - Healthcare: increase private sector role; increase average life expectancy from 74 to 80 years. - Oil and gas: increase share of domestically owned (localized) output from 40 percent to 75 percent. - Housing: boost home ownership from 47 percent to 52 percent by 2020. - Military: create military industry holding company; boost local participation in defense production. - Education: curriculum modernization; greater focus on training teachers and measuring performance. - Productivity and governance targets - Move into top-10 position on Global Competitiveness Index (25th currently). - Raise ranking in Global Logistics Performance Index from 49th currently to 25th. - Raise ranking within Government Effectiveness Index from 80th currently to 20th. - Immigration and state enterprises - Green card-like program for foreign workers within five years. - Visa exemption for expats working in King Abdullah business district. - Aramco IPO of up to 5 percent equity stake; dual listing likely. Government estimates value of Aramco at over $2 trillion. - Public Investment Fund (PIF): SWF to be created; PIF assets to be increased from SR600 billion currently to SR7 trillion by 2030. - All targets are for 2030 unless otherwise stated. ### Status of staff recommendations from the 2015 Article IV Consultation (selected) - A sizeable and sustained fiscal consolidation needs to begin. - Status: Fiscal consolidation began in 2015H2 and continued with the 2016 budget. Authorities have said they will balance the budget but have not yet set out a medium-term fiscal consolidation plan. - Strengthen the fiscal policy framework. - Status: A macro-fiscal unit established within the Ministry of Finance and a head appointed. Fund TA being provided. Authorities aiming to move toward a medium-term fiscal framework and have introduced key performance indicators for Ministries. - Comprehensive energy price reforms are needed. - Status: In the 2016 budget, government announced intention to gradually raise energy and water prices over a 5 year period. A first round of price increases implemented, raising prices between 10-134 percent depending on the product. - Strengthen the non-oil revenue base. - Status: Government will introduce excise taxes on tobacco and sugary drinks in 2017 and a VAT in 2018. IMF TA is being provided. A tax on undeveloped land is being finalized. - Review capital and current expenditures to better align spending with policy priorities. - Status: The National Project Management Office has been set up to strengthen project management. All capital and current spending is being reviewed and prioritized. - Reduce the government wage bill. - Status: A review of allowances for government employees is ongoing. Employment in the civil service fell in 2015 and the NTP targets a reduction in the government wage bill of 5 percent by 2020. - Issue debt to finance the fiscal deficit rather than relying solely on asset draw-downs. - Status: The government issued domestic debt in 2015 for the first time since (text ends). *International Monetary Fund staff summary from the referenced chapter.* ### 2007. An international loan has been finalized in 2016 and a sovereign ### _cr16326 - 2007. An international loan has been finalized in 2016 and a sovereign ### Financial sector reforms and macroprudential framework - An international loan has been finalized in 2016 and a sovereign bond may be issued later this year. - Fund TA is being provided on establishing a Debt Management Office (DMO). - Strengthen macroprudential policy framework to mitigate financial sector risks in a countercyclical way: - Authorities considering setting up a National Financial Stability Committee. - Early Warning Systems (EWS) have been strengthened. - The countercyclical capital buffers (CCB) framework has been introduced. - A first Financial Stability Report was published in June 2015 and a second in May 2016. - Introduce reforms to strengthen financial regulation and supervision: - The domestically systemically important banks (D-SIB) framework has been published. - Identified banks should comply with the higher capital charges in 2016. ### Private sector development, diversification, and employment of Saudis - Encouraging private sector-led growth: - High oil prices and government spending increases have been the main engines of growth over the past decade; incentives tilted nationals toward public sector employment and private sector production toward non-tradables. - Government developing plans to encourage private investment, spur productivity growth, and increase employment of nationals in the private sector. - Privatization and PPP agenda: - Plans to sell two airports and the grain silos corporation this year; broader asset sales and PPPs planned, including selling a stake in Aramco. - Staff recommendations: clear timetable, legal and institutional framework, transparent environment fostering competition; review of tax regime for the oil sector suggested. - PPPs should be structured to avoid unexpected fiscal costs and capacity built to monitor operations and service delivery. - Business environment and SME development: - Retail and wholesale sectors opened to 100 percent foreign investment. - New companies’ law reduces administrative burden on SMEs, strengthens minority shareholder rights, and improves corporate governance. - Work on a new insolvency law and stronger contract enforcement is ongoing. - FDI inflows have slowed substantially; a review of FDI policy recommended. - SME Authority established; Kafalah loan-guarantee program continues. - Policies needed to increase employment of Saudis in the private sector: - Set expectations about future availability of public sector jobs—government should state that future public sector employment opportunities will be very limited. - Reduce the wage gap between Saudi and expatriate workers; allow greater mobility of expatriate workers and delink visa from sponsor. - Concerns about proposed reforms to the Nitaqat program; staff suggested a simpler system of higher fees or limits on visas phased in gradually. - Education reforms and skills development should focus on improving quality. - Increasing female participation: over 50 percent of university graduates are women, but female national participation rate is very low; policies to improve transportation, telework, flexible work arrangements, and childcare facilities recommended. ### Fiscal consolidation: objectives, scenarios, and sequencing - A sizeable and sustained fiscal consolidation is needed. Achieving the fiscal targets in the 2016 budget is a key first priority. - 2016 budget management actions described: - Spending restraint via strict controls on transfers across budget lines, limiting overtime and wage allowances, reducing contracted spending, tighter controls on government employment. - An unallocated “Budget Support Provision” (22 percent of total spending) was created within the overall 2016 spending envelope. - Staff urged development of a clear and credible medium-term fiscal consolidation plan: - Vision 2030 objective: balancing the budget. - NTP sets strategic objectives and 2020 targets; cost estimates of NTP initiatives approved to start in 2016 total about 2 percent of GDP a year from 2016–20. - NTP does not bring revenue and expenditure targets together in an overall fiscal framework; staff cautioned that too rapid a pace of fiscal adjustment would have adverse consequences for non-oil growth and employment. - Staff supported a target of balancing the budget as set out in Vision 2030 and the NTP, achieved over the next 5 years (staff adjustment scenario): - This fiscal path would stabilize the government’s net financial asset-to-GDP ratio at a little above zero and preserve space to manage future shocks and policy priorities. - It would move the primary balance toward intergenerational equity (a surplus of 3.7 percent of GDP in 2021). - If oil prices exceed expectations, additional revenues should be saved; if below expectations, determine whether decline is temporary or permanent and act accordingly. - Fiscal consolidation impacts: - Consolidation will have short-run growth costs but deliver stronger medium-term growth. - In the adjustment scenario, non-oil growth is expected to be weaker in 2017–19 than in the baseline, then recover more strongly as fiscal consolidation reduces risk premium and crowding-out. - Effective sequencing and protection of high-return public investment projects recommended. ### Revenue reforms and tax measures - Revenue reforms central to fiscal adjustment: - Excise taxes on tobacco and sugary drinks planned in 2017. - VAT planned for January 2018: once GCC agreement finalized, individual countries to enact legislation consistent with agreement. - Agreed GCC parameters: initial VAT rate 5 percent; turnover threshold $1 million; list of zero-rated/exempted items agreed by GCC (individual countries choose items). - Staff estimate revenue impact of excises and VAT at about SAR 40 billion. - Support expressed for “white lands” tax (2.5 percent tax on undeveloped land); staff suggested minimizing zero-rating/exemptions and cautioned against earmarking “white lands” tax revenue for housing projects. - Consideration of a higher VAT rate if GCC agreement reached; longer-term options include an income tax on domestic companies and a tax on high-end property, but short-term priority is successful implementation of excises, VAT, and white lands tax. ### Baseline and Fiscal Adjustment Scenario (selected figures, Percent of GDP unless otherwise noted) - Baseline Scenario (2014–21, selected rows): - Overall balance: -3.4 -15.9 -13.0 -9.6 -8.8 -7.0 -6.3 -7.7 - Non-oil primary balance (Percent of non-oil GDP): -64.0 -50.8 -39.3 -36.2 -35.7 -32.6 -32.0 -33.1 - Non-oil primary revenue: 3.9 4.9 5.9 5.9 7.3 8.0 8.1 8.2 - Primary spending: 40.2 41.2 35.4 32.3 33.5 31.9 31.7 32.6 - (1) Total government debt: 1.6 5.0 14.3 20.2 25.1 28.8 32.0 36.1 - (2) Government Deposits with SAMA: 50.0 43.3 39.4 33.7 28.8 25.2 22.1 18.8 - Net government financial assets (2-1): 48.4 38.3 25.1 13.6 3.7 -3.6 -9.9 -17.3 - Current account balance: 9.8 -8.3 -6.4 -2.7 -1.9 -1.2 -0.7 -0.3 - Central Bank gross reserves (in months of imports): 35.4 32.3 27.9 24.4 21.4 18.8 16.6 14.7 - Credit to the private sector (percentage change): 11.8 9.2 6.0 5.3 5.9 5.9 5.3 5.2 - Real GDP growth (percent): 3.6 3.5 1.2 2.0 2.6 2.6 2.3 2.3 - Real oil GDP growth (percent): 2.1 4.0 0.6 1.1 1.2 1.2 1.1 1.1 - Real non-oil GDP growth (percent): 4.8 3.1 1.6 2.7 3.6 3.6 3.2 3.1 - Fiscal Adjustment Scenario (2014–21, selected rows): - Overall balance: -3.4 -15.9 -13.0 -8.8 -5.3 -2.2 -0.3 0.0 - Non-oil primary balance (Percent of non-oil GDP): -64.0 -50.8 -39.3 -34.2 -29.7 -24.5 -21.8 -20.4 - Non-oil primary revenue: 3.9 4.9 5.9 7.2 9.9 11.8 12.9 13.8 - Primary spending: 40.2 41.2 35.4 32.5 32.2 30.4 29.8 29.8 - (1) Total government debt: 1.6 5.0 14.3 19.3 21.7 21.9 20.7 19.5 - (2) Government Deposits with SAMA: 50.0 43.3 39.4 33.2 28.9 26.3 24.5 22.9 - Net government financial assets (2-1): 48.4 38.3 25.1 13.9 7.3 4.5 3.7 3.4 - Current account balance: 9.8 -8.3 -6.4 -2.6 -0.7 1.2 2.7 4.1 - Central Bank gross reserves (in months of imports): 35.4 32.3 28.1 25.2 23.4 22.3 21.9 22.3 - Credit to the private sector (percentage change): 11.8 9.2 6.0 5.8 6.5 6.9 8.6 8.6 - Real GDP growth (percent): 3.6 3.5 1.2 1.3 1.3 1.5 1.5 1.7 - Real oil GDP growth (percent): 2.1 4.0 0.6 -0.1 -0.4 -1.0 -1.4 -1.5 - Real non-oil GDP growth (percent): 4.8 3.1 1.6 2.4 2.6 3.2 3.5 3.8 ### Fiscal adjustment composition and net fiscal savings (SAR billion and percent of GDP) - Baseline reforms (SAR billion by year, 2016–2021 entries where shown): - Energy price reform (baseline): 28 29 29 30 30 30 - Fees, fines, and tax collection improvement: 6 11 17 22 28 - VAT: 35 53 56 59 - Excise tax: 6 5 5 5 5 - Increase in spending on VAT: 13 -20 -21 -22 - Total (baseline): 28 40 94 85 92 100 - Additional reforms under the adjustment scenario (SAR billion): - Energy price reform 1/ 2/: 35 78 125 168 208 - Wage control 1/: 1 15 19 25 36 - Household compensation: -22 -31 -43 -55 -65 - Capital spending control 1/: 5 34 42 51 60 - Other 3/: -3 -5 -5 -3 14 - Total (additional): 1/ 16 91 138 187 253 - Grand total (baseline and adjustment): 28 56 185 223 279 352 - Memo item: Annual savings from additional reforms as a percent of GDP 4/: 0.6 2.6 1.5 1.5 1.8 - Notes: - 1/ In addition to the baseline. - 2/ Net gains after accounting for long-term energy contracts with private firms, government's own energy consumption and government support to companies to adjust to higher energy prices, estimated at SR 104.6 billion by 2021. - 3/ Includes changes in interest payments, investment income and fees and charges and other automatic changes associated with changes in inflation and GDP growth. - 4/ Using GDP under adjustment scenario. ### Energy and water price reforms (Box 5) — outcomes, estimates, and implementation issues - December 2015 measures: increase in prices across most major energy and water products without compensation to businesses or households. - Expected to generate revenues of SR 28 billion ($7.5 billion) for Aramco in 2016 and reflected as higher government revenues. - Electricity and water tariffs raised or made applicable to lower consumption users; estimated revenue gains expected to offset higher fuel input cost of producers. - Staff estimate of gradual increases to international/cost recovery levels over 5 years: - Gross revenue gains by end-2021: SR 314 billion or about 10 percent of GDP. - Net revenue impact after compensation estimated at about 5 percent of GDP in 2021. - Table 1: Increases in Saudi Domestic Price of Energy Products (Old Domestic prices; New Domestic prices; Change in prices; US$ per unit 1/): - Gasoline 95 octane: 0.16 -> 0.24, 50% - Gasoline 91 octane: 0.12 -> 0.20, 67% - Diesel Transportation sector: 0.07 -> 0.12, 80% - Diesel Industrial sector: 0.07 -> 0.09, 32% - Natural Gas Methane: 0.75 -> 1.25, 67% - Natural Gas Ethane: 0.75 -> 1.75, 134% - Fuel Oil: 0.01 -> 0.02, 83% - ALCO: 0.03 -> 0.04, 50% - Butane: 0.15 -> 0.17, 14% - Jet A-1: 0.07 -> 0.15, 120% - JP-8: 0.07 -> 0.16, 120% - Kerosene: 0.11 -> 0.16, 53% - Natural Gasoline: 0.22 -> 0.24, 10% - Propane: 0.13 -> 0.14, 11% - Sources: Country authorities and IMF staff calculations. - 1/. Energy products measured in liters except natural gas measured in mmbtu. - Table 2: Revenue gains from energy price reform by 2021 (in US$ billion and SR): - In US$ billion: 2016 = 7.5; 2017-2021 = 83.8 - Gross revenue gains (SR): 28.3 ; 314.3 - Net revenue gains (SR): 28.3 ; 144.3 - Breakdown (SR): Household: Cash transfers; Wealth sharing (per capita) 37.1; Social protection (based on household size and targeted) 28.3; Non-Households: Mitigating measures/offsetting factors 1/ 104.6 - 1/. Offsetting factors for non-households accounts for firms with long-term energy supply contracts, government's own energy consumption and government support to companies to adjust to higher energy prices. ### Government wage bill and civil service reform - Containing the government wage bill is essential; government spending on wages and salaries is high by international standards. - Authorities have been restricting new hiring resulting in a net decline in civil service employment last year. - NTP objective: reduce civil service employment by 20 percent by 2020. - Pilot program in several ministries to improve human resource practices, including devolving recruitment decisions. - Staff recommended a civil service review to identify additional savings through attrition and reforms of salary and allowance structure. - Other current expenditure savings sought through procurement review and benchmarking service costs against best practices. *International Monetary Fund — Staff report content provided in the source PDF.* ### 33. The government is strengthening the management of public investment. The National ### The government is strengthening the management of public investment. ### Public investment management and performance management - The National Project Management Office (NPMO) was recently established to take the lead role in improving project management standards across ministries. - The project approval process has been strengthened, which should result in more targeted and efficient spending. - Staff noted that despite the sharp cutbacks in 2015 and 2016, capital spending remains high by international standards and welcomed the steps the authorities are taking to strengthen public investment management. - A performance management program has been introduced for ministries. - Key performance indicators (KPIs) have been established, including through the NTP, and will be reported to and monitored by the recently established performance management agency. ### Fiscal framework reforms and public expenditure management - Reforms to the fiscal framework should be integral to the fiscal adjustment process to reduce implementation risks. - Priorities identified by staff: - Develop a medium-term fiscal framework. - Strengthen the annual budget process. - Increase transparency and accountability. - The fiscal framework should include fiscal targets to guide the medium-term adjustment. - A formal fiscal rule could eventually be considered to support the accumulation of substantial financial buffers during periods of high oil prices and delink expenditures from oil revenue volatility. - The framework should assess risks to the fiscal outlook, including from the future pension commitments of PPA and GOSI. - Staff recommended a review of the public expenditure management system to ensure deferred payments to contractors are not repeated. - Staff suggested that the “budget support provision,” while potentially helpful to facilitate adjustment in 2016, is not consistent with effective budgeting over the medium-term. - The establishment of a macro-fiscal unit and the appointment of the unit head were seen as important steps in strengthening macro-fiscal analysis. ### Fiscal transparency and integration of public entities - Staff emphasized improving fiscal transparency and better integrating key public entities into the budget. - The move to GFSM2014 format for the 2016 fiscal data was welcomed, but staff noted fiscal transparency is lagging compared to other G-20 countries. - The 2016 budget published more details about revenues and expenditures than previous years, but still did not provide full information about the 2015 outturn or 2016 budgeted revenues and expenditures. - Steps recommended to enhance fiscal transparency: - Start publishing full details of annual budgeted revenues and expenditures. - Publish within-year quarterly fiscal updates on budget execution. - The Public Investment Fund (PIF) and Aramco should be better integrated in the fiscal framework and their operations made more transparent. - The government should clarify the rules and the level of transfers between the budget and the PIF. - The PIF should receive its share of oil revenues from Aramco and then make transparent payments for expenditures carried out by Aramco on its behalf. - Increased fiscal transparency will be needed to effectively monitor progress toward the NTP objectives. ### Asset-liability management and budget financing - Authorities have finalized a $10 billion loan from international banks and are considering issuing a sovereign bond. - Domestically, authorities are issuing bonds to banks and non-bank institutions, expanding issuance beyond fixed rate instruments to include floating rate notes and murabaha. - Staff view: relying on a combination of asset drawdown and domestic and external borrowing is likely to best strike a balance between addressing risk/return tradeoffs and minimizing macro-fiscal-financial implications of domestic debt issuance. - A Debt Management Office (DMO) is being set up within the Ministry of Finance. - Staff urged making the DMO operational quickly and developing a medium-term debt management strategy (MTDS) to guide borrowing. - Debt issuance program should encourage development of a deep and liquid domestic debt market, including for the private sector. - Improve communication with the market by announcing an issuance calendar in advance and developing a secondary market for government securities. - Introduce auctions for government debt whereby yields are market determined and better reflect market liquidity conditions. ### Integrated balance sheet and asset management - Saudi Arabia needs an integrated approach to managing its balance sheet to avoid asset-liability mismatches. - Authorities are clarifying asset management responsibilities: - PIF’s mandate is being changed towards a more typical sovereign wealth fund, with a longer-term horizon and higher risk tolerance, focused only on returns rather than development objectives. - SAMA will continue to manage gross reserves held more for precautionary purposes. ### External position, exchange rate peg, and adjustment - The external position weakened substantially in 2015, more than suggested by fundamentals and desirable medium-term policy settings. - Substantial fiscal adjustment—consistent with the staff’s fiscal adjustment scenario and the government’s objective of balancing the budget—will be necessary over the medium-term to reduce the current account deficit, stem the loss of reserves, and support the exchange rate peg. - Staff view: as long as a credible fiscal adjustment is in place, the exchange rate peg remains the best option for Saudi Arabia. - Reserve metrics at end-2015: - 32 months of imports - 129 percent of broad money - 700 percent of the Fund’s reserve metric - Possible benefits of depreciation noted (e.g., boost fiscal revenues in riyal terms), but staff highlighted significant risks and limited competitiveness benefits given the economy’s export and import structure. - The peg should be reviewed periodically in coordination with other GCC countries. - Reforms to support a possible future move to a more flexible regime are desirable, including in liquidity management and debt and money market development. ### Financial sector conditions and reforms - Banking sector remains strong but is affected by lower oil prices. - NPLs expected to rise from a low level of 1.2 percent. - Rapid growth in credit to the construction sector: 8 percent of bank credit. - Liquidity conditions: - Three-month SIBOR has risen above 2 percent and spreads to U.S. LIBOR have widened. - At the current pace of drawdown, bank excess liquidity will be depleted within 2 to 3 quarters. - Liquidity Coverage Ratio (LCR) is high. - Staff recommendations on liquidity management: - Review liquidity forecasting framework and tools for day-to-day liquidity management. - Consider easing reserve requirements if liquidity pressures are a source of banking sector stress, noting reserve requirements are too inflexible for daily management and the standing facility is passive. - When easing liquidity pressures, consider impacts on financial outflows. - Banks appear able to absorb further negative shocks to asset quality and liquidity, supported by high capital ratios. - SAMA is regularly monitoring bank capital and liquidity, using stress tests. - Strengthen macroprudential framework: - Make the National Financial Stability Committee (NFSC) operational to formalize coordination between SAMA, the Capital Markets Authority (CMA), and the MoF. - Consider Specialized Credit Institutions (SCIs) in macroprudential policy deliberations. - A countercyclical capital buffers (CCB) framework is now in place. - Macroprudential policy actions noted: - SAMA recently relaxed the loan-to-deposit ratio to 90 percent (from 85 percent) to prevent a sharp across-the-board credit squeeze. - Staff stressed that additional room should not be used to extend credit to weak companies. - Regulatory and supervisory strengthening by SAMA: - Implemented Basel III risk-based capital regulations; prudential regulations compliant with Basel framework. - Aggregate large exposure limit of 400 percent of capital introduced. - Single borrower exposure limits being reduced from 25 percent of capital to 15 percent by 2019. - Capital surcharges for Domestic-Systemically Important Banks (D-SIB) introduced in 2016. - Crisis management framework strengthened: deposit insurance scheme introduced to protect deposits up to SAR 200,000; draft bank resolution framework legislation being discussed; framework for emergency liquidity provision being designed and tested. - Concerns and actions on correspondent banking and de-risking: - SAMA active in convening domestic banks with major foreign banks and regulators to clarify home supervisor requirements and maintain communication channels. - Shadow-banking, when defined as outside the regulatory perimeter, is relatively small. - Progress has been made in implementing recommendations of the 2011 FSAP Update; an FSAP Update has been requested for 2017. ### AML/CFT and statistics - Authorities are finalizing the money laundering and terrorist financing national risk assessment and enhancing national coordination between concerned agencies. - Saudi Arabia’s AML/CFT regime is expected to be assessed in late 2017 for compliance with revised international standards, after which FATF will deliberate on the country’s application for full membership. - Efforts continue to strengthen economic statistics, but important gaps remain. - Fiscal data for 2016 is being prepared in GFSM2014 format. - Work is ongoing on FDI, external debt, and real estate price data. - Staff suggested fiscal data for 2015 at least should be made available in GFSM2014 format to allow an adequate assessment of fiscal policy developments. ### Staff appraisal — key findings and outlook - Oil price decline is affecting the economy: non-oil sector activity is slowing, equity prices and corporate profits have fallen, and real GDP growth is expected to moderate to 1.2 percent this year, from 3.5 percent in 2015, before recovering to 2.3-2.6 percent over the medium-term. - Fiscal and current account balances have moved into large deficits, and bank deposits are declining while credit growth has remained strong. - Fiscal and financial buffers built up over the past decade have helped cushion the impact and provided time for policy response. - Upside risks to growth: possibility of higher oil prices and stronger impact of structural reforms. - Downside risks to growth: lower oil prices or failure to implement needed fiscal adjustment. - Vision 2030 and the NTP represent a fundamental policy shift with bold goals; full implementation details are not yet released. - Authorities should clearly lay out, prioritize, and sequence policy measures to reduce implementation bottlenecks and limit reform fatigue. - With fiscal reforms likely to have negative short-term effects on growth and employment, accompanying growth-enhancing structural reforms will be needed. - Increasing the role of the private sector is important for growth, productivity, and diversification: - Privatization and PPPs can reduce government footprint and lead to productivity gains. - Success of privatization program depends on clear timetable, legal and institutional framework, transparent sales process, and sufficient post-privatization competition. - Given the proposed sale of a stake in Aramco, this is an opportune time to review the tax regime as it applies to the oil sector to align with international best practices. - Reforms to strengthen the business environment, encourage foreign direct investment, support SMEs, and deepen domestic capital markets are important. *Source: IMF staff report excerpt.* ### 54. Continued labor market reforms are needed to encourage the employment of ### Continued labor market reforms are needed to encourage the employment of ### Labor market challenges and recommendations - Fiscal consolidation reduces availability of public sector jobs, increasing the challenge of generating employment for the growing number of young Saudis. - Policies should: - Clearly set expectations about the future availability of public sector jobs. - Increase the competitiveness of Saudi nationals in the private sector. - Strengthen education and training programs so nationals acquire the skills needed for private sector jobs. - Proposed changes to Nitaqat may make the program more difficult and costly to implement. - Reducing barriers to female participation is important to better integrate these educated and skilled workers into the labor force. ### Fiscal consolidation: scope and instruments - A gradual, but sizable and sustained further fiscal consolidation is needed. - The 2016 budget is a good start; a key priority is to achieve the targets set therein. - Vision 2030 sets the goal of balancing the budget; a credible medium-term fiscal consolidation plan consistent with achieving this objective in the coming years should be developed. - The consolidation should be based on both revenue and expenditure measures including: - A gradual increase in energy prices. - The introduction of the VAT and excises. - Firm control of the government wage bill. - Further reforms to enhance public investment efficiency. - Regarding the VAT: - The GCC agreement should be finalized as soon as possible and administrative preparations need to start. - Caution: fiscal measures should be calibrated to achieve overall fiscal objectives—an excessively rapid tightening of fiscal policy would damage growth and employment prospects. ### Strengthening the fiscal framework and public expenditure management - Priorities: - Develop a medium-term fiscal framework. - Strengthen the annual budget process. - Enhance fiscal transparency and accountability. - Institutional measures: - Establish the macro-fiscal unit. - Develop a fiscal rule to improve macro-fiscal analysis and guide fiscal adjustment. - Undertake a public expenditure management review to ensure spending commitments are controlled and payments are not deferred. - Balance-sheet integration and transparency: - Given their size and importance, Aramco and the PIF should be better integrated into the budget. - Fiscal transparency should be improved by publishing full details of budgeted revenues and expenditures and budget outcomes, and providing regular quarterly updates on budget execution. ### Financing the fiscal deficit and domestic debt market development - Financing decisions (draw down assets vs. issue domestic or external debt) should be assessed within an integrated asset-liability management strategy to avoid undue risks and costs and to minimize risks of crowding-out credit to the private sector. - Government debt issuance provides an opportunity to develop the domestic debt market: - Introduce auctions for government debt. - Develop a secondary market to help establish a risk-free yield curve and support the development of the corporate debt market. ### Exchange rate regime - As long as a credible fiscal adjustment is in place, the exchange rate peg remains the best option for Saudi Arabia given the structure of its economy. - The peg has served Saudi Arabia well and the potential costs of moving away from the peg outweigh the possible benefits. - The peg should be reviewed periodically in coordination with other GCC countries to ensure it remains appropriate given the desired evolution of the economy away from its current reliance on oil. ### Banking sector resilience and liquidity management - The banking sector is well positioned to absorb the effects of lower oil prices and fiscal consolidation: - Capital buffers are strong. - NPLs are low. - Banks are well provisioned against loan losses. - While NPLs are likely to rise, banks have sufficient buffers to comfortably absorb these losses. - Supervisory guidance: - SAMA should continue to monitor credit quality closely, particularly in the construction sector. - Liquidity: - Liquidity conditions have tightened. - SAMA can ease reserve requirements as needed. - SAMA should develop a robust liquidity forecasting and management framework to manage day-to-day liquidity. ### Macroprudential coordination - The macroprudential framework would be strengthened by operationalizing the National Financial Stability Committee (NFSC) to formalize coordination across key stakeholders. - The SCIs should be included in macroprudential decisions given their overlaps with banks in some areas and their size and influence on the domestic financial system. - Within a macroprudential framework, the relaxation of policy tools should be: - Guided by careful monitoring of risk indicators to financial stability. - Triggered by the assessment that systemic risk has materialized and financial conditions have tightened, seriously affecting activity. ### Statistical improvements - Further progress is needed to improve economic statistics. - The move to GFSM2014 is welcome, but further work is needed particularly in the areas of: - Fiscal, external, monetary, real estate, and labor market statistics. - The objective of subscribing to SDDS should be announced as soon as possible. *Source: IMF staff report excerpt.* ### 62. It is recommended that the next Article IV consultation take place on the standard ### _cr16326 - 62. It is recommended that the next Article IV consultation take place on the standard ### Recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Real Sector Developments - Contributions to Real GDP Growth (Percent) shown for 2007–2015 by component: Public consumption, Private consumption, Public investment, Private investment, Change in stocks, Net exports, GDP. - Real GDP (y-o-y percent change) components 2008–2015: Oil; Non-oil: private; Non-oil: public. - Purchasing Managers' Index (Index) series: New Orders and Business Conditions (Jan-11 through May-16). - Indicators of Consumer Spending (3 month moving average, y-o-y percent change): Transaction growth and ATM withdrawals growth (2011–2016). - Net Incomes of Listed Saudi Corporates by Sector (US$ billion): sector list includes Petrochem., Real Estate Dev., Agriculture & Food, Cement, Telecoms, Retail, Industrials, Transport, Energy & Utilities, Building & ..., Hotel & Tourism, Multi-investment, Media & Publishing for 2014 and 2015. ### Oil Market Developments - Sources: JODI; Bloomberg; IEA; Baker Hughes; Energy consensus forecast; IMF staff calculations. - Oil Production and Exports (Million barrels per day): Exports: Crude Oil; Exports: Refined products; Oil production (Jan-11 through Jan-16). - Indicator of Oil Investment: BHI International Rig Counts (Jun-12 through Mar-18 series). - Consensus Oil Price Forecasts (Brent Crude Oil Forecasts, US$/barrel): Historical, Consensus Forecasts, High, Low (T-36 to T+36 horizons). - Oil Production in Periods of Falling Oil Prices 1/ (Monthly Crude Oil Production, mbd) for episodes 1981-1986, 1998-1999, 2008-2009, 2014-2016. - Output of Major Oil Producers (Million barrels per day): Russia, Saudi Arabia, US, Iran, Iraq (Jan-11 through Jan-16). - Brent Crude Oil (U.S. dollars a barrel) futures and confidence intervals, derived from prices of futures options on May 31, 2016. ### Fiscal Developments - Real expenditures are deflated by the CPI. - Structural revenues: estimated by assuming long-term oil price is the average oil price from past five years; long-term oil output is three year moving average including current year; structural balance = structural revenues less total expenditures. - Sustainable level of fiscal spending from oil wealth: defined as an annuity constant in real per capita terms. - Fiscal Balance (Percent of GDP) series for 2010–2016 and projections for GCC members: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, U.A.E. - Break-even Oil Prices (U.S. dollars per barrel): Average crude price in 2015: $51. - Real Government Spending (Percent) and projected Non-oil deficit (% non-oil GDP) series 2010–2016. - Structural and Overall Fiscal Balance 2/ series and projections (2010–2021). - Fiscal assumptions and details in Table formats (see Tables 1–4, 6). ### External Sector Developments - Spot Crude Price: Dubai ($/BBL, DOE) and Petrochemical Price Index (RHS) (Jan-10 through May-16). - International Investment Position (US$ billion) 2009–2015: Asset and Liability components and Net IIP. - Contribution to Non-oil Export Growth (Percent) by product (2007–2015): re-exports, Machinery & Electrical, Metal Products, Plastic products, Petrochemicals, Foodstuff, Total. - Contribution to Import Growth (Percent) by product (2007–2015): Machinery and Equipment, Transportation, Base metals, Chemical products, Agricultural products, Plastic products, Mineral products, Others, Total imports. ### Monetary and Financial Developments - Credit Growth (y-o-y percent change) series for SCI credit growth, Bank credit to private sector growth, Total credit growth (2007Q1–2015Q3). - Sectoral Decomposition of Credit Growth (Percent) (2010Q1–2016Q1): Other (incl Agriculture), Services, Govt & Quasi Govt, Consumer loans, Finance, Transportation, Commerce, Building and Construction, Manufacturing/Processing/Mining. - Real Estate Loans Growth (y-o-y percent change) and Share of Total Lending to Private Sector (RHS). - Excess Liquidity in Banking Sector (Percent of bank assets) time series (Jan-10–May-16). - Commercial Bank Deposits growth (y-o-y percent change) and Loan to Deposit Ratio (RHS). - Policy and Interbank Interest Rates (Percent, daily closing rates): Repo Rate, 3-month SIBOR, Reverse Repo Rate (Jan-10–May-16). ### Labor Market Developments - Unemployment Rate of Nationals by Gender (Percent of total labor force for each gender) 2000–2014: Male, Female, Total. - Growth Rate of Employment in Saudi Arabia (Annual percent change) and New Saudi Jobs (in percent of total new jobs), RHS. - 2015 Employment in Private Sector (thousand employed) by sector and by Nationality (Non-Saudi, Saudi) (y-o-y change). - Labor Force Participation Rates of Saudi Nationals by gender (Percent of total population of each gender) 2012–2015. ### Inflation and Asset Price Developments - Headline CPI Inflation (y-o-y percent change or contribution) and contributions: Rent 1/, Other 1/, Food 1/ (Feb-12–Feb-16). - Food Price Indices (y-o-y percent change) Saudi Arabia and World index (Jan-08–Jan-16). - Real and Nominal Effective Exchange Rates (Index, 2010=100; increase = appreciation): REER and NEER (Jan-00–May-16 shown). - PMI Input and Output Index: Input price index and Output price index. - Equity Prices (y-o-y percent change) for All shares, Petrochemicals, Constructions. - Spot and Forward Exchange Rates, and Oil Prices (Saudi Riyal per US$): Spot exchange rate, 12M forward exchange rate, Oil prices (RHS, US$ per barrel) (Jan-10–May-16). ### Indicators of the Business Climate - Sources: Global Competitiveness Report 2015–16; Economic Freedom of the World 2015; Doing Business 2014–15, 2015–16. - Trade Barrier Ranking and Trade Tariffs (% duty) comparisons across GCC: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE. - Doing Business Rankings: GCC (Global Ranking, 1=best) for 2015 and 2016; Doing Business Indicators breakdown: Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, Resolving Insolvency (2015, 2016). - Most Problematic Factors for Doing Business (Percent of Responses): Crime and theft; Government instability/coups; Poor public health; Inflation; Corruption; Tax regulations; Foreign currency regulations; Inadequate supply of infrastructure; Tax rates; Policy instability; Insufficient capacity to innovate; Poor work ethic in national labor force; Access to financing; Inefficient government bureaucracy; Inadequately educated workforce; Restrictive labor regulations. - Service Trade Restrictions Index and Economic Freedom Summary Index comparisons across GCC members. ### Upside/Downside Oil Price and External Borrowing Scenarios (Figure 9) - Scenario definitions: - High (low) oil price scenario assumes oil price to be 25 percent above (below) the WEO oil price. 1/ - High (low) borrowing scenario under the low oil price scenario assumes external borrowing to be 50 percent higher (lower) than the external borrowing assumed under the baseline. 2/ - Fiscal Balance (in percent of GDP), Net Financial Assets (in percent of GDP), Current Account Balance (in percent of GDP), Reserves (in months of imports) shown for 2014–2021 under baseline, high oil price, low oil price, and borrowing variants. - Adjustment Scenario included as an alternative to Baseline in some panels. ### Economic Outcomes under Baseline and Reform Scenarios (Figure 10) - Series for 2014–2021 comparing Baseline and Full Adjustment Scenario for: - Non-oil Revenue (in percent of GDP) - Fiscal Balance (in percent of GDP) - Net Financial Assets (in percent of GDP) - Non-oil Real GDP Growth (in percent) - Inflation (in percent) - Credit to Private Sector Growth (in percent) - Current Account Balance (in percent of GDP) - FX Reserves (in months of imports) ### Selected Economic Indicators, 2012–21 (Table 1) — key figures preserved exactly - Crude oil production (million of barrels per day)1: 9.8 9.6 9.7 10.2 10.2 10.3 10.4 10.5 10.5 10.6 - Average oil export price (U.S. dollars per barrel)2: 109.4 105.4 95.7 49.8 43.1 50.1 52.0 54.0 55.9 57.5 - Nominal GDP (SAR billions): 2,752 2,791 2,827 2,423 2,424 2,609 2,798 2,952 3,102 3,252 - Nominal GDP (US$ billions): 734 744 754 646 646 696 746 787 827 867 - Real GDP: 5.4 2.7 3.6 3.5 1.2 2.0 2.6 2.6 2.3 2.3 - Oil (real GDP growth): 5.1 -1.6 2.1 4.0 0.6 1.1 1.2 1.2 1.1 1.1 - Non-oil (real GDP growth): 5.5 6.4 4.8 3.1 1.6 2.7 3.6 3.6 3.2 3.1 - Consumer price index (avg): 2.9 3.5 2.7 2.2 4.2 2.0 4.7 2.0 2.0 2.0 - Current account balance (percent of GDP): 22.4 18.2 9.8 -8.3 -6.4 -2.7 -1.9 -1.2 -0.7 -0.3 - Government deposits at SAMA: 50.9 54.0 50.0 43.3 39.4 33.7 28.8 25.2 22.1 18.8 - Central government's gross debt: 3.6 2.2 1.6 5.0 14.3 20.2 25.1 28.8 32.0 36.1 - SAMA's total net foreign assets (US$ billions): 647.6 716.7 724.3 608.9 542.9 500.9 455.1 415.3 380.4 349.9 - In months of imports of goods and services (3): 33.8 33.2 35.4 32.3 27.9 24.4 21.4 18.8 16.6 14.7 - Population (millions): 29.2 30.0 30.8 31.4 32.0 32.7 33.3 34.0 34.7 35.3 - Unemployment rate (nationals, in percent of total): 12.1 11.7 11.7 11.7 11.5 (Other series and full table available in source content.) ### Budgetary Central Government Operations, 2014–21 (Table 2) — selected line items preserved exactly - Revenue (SAR billions): 1,044 616 514 551 606 716 771 831 861 - Oil revenue (SAR billions): 913 446 343 418 472 493 539 556 - Non-oil revenue (SAR billions): 131 169 208 188 244 278 292 304 - Expenditure (SAR billions): 1,141 1,002 840 865 857 961 977 1,027 1,113 - Expense (SAR billions): 670 671 632 627 711 714 750 823 - Net acquisition of non-financial assets (SAR billions): 47 133 123 123 230 250 263 276 290 - Budgeted capital expenditures (SAR billions): 440 308 208 218 235 248 261 275 - Net lending (+)/borrowing (-) (SAR billions): -96 -386 -326 -314 -251 -245 -206 -196 -252 - Revenue (Percent of GDP): 36.9 25.4 21.1 22.7 23.2 25.6 26.1 26.8 26.5 - Expenditure (Percent of GDP): 40.3 41.3 34.6 35.7 32.8 34.4 33.1 33.1 34.2 - Net lending (+)/borrowing (-) (Percent of GDP): -3.4 -15.9 -13.5 -13.0 -9.6 -8.8 -7.0 -6.3 -7.7 - Government Deposits at SAMA (SAR billions): 1,413 1,050 956 880 807 745 686 611 ### Fiscal Operations of the General Government, 2010–15 (Table 3) — percent of GDP highlights - I. Budgetary central government revenue (Percent of GDP): 37.5 44.5 45.3 41.4 36.9 25.4 - I. Expenditure (Percent of GDP): 34.0 33.4 33.3 35.6 40.3 41.3 - I. Overall balance (Percent of GDP): 3.6 11.2 12.0 5.8 -3.4 -15.9 - IV. General government overall balance (Percent of GDP): 5.2 12.0 14.7 8.7 -0.7 .... - Memorandum: Net assets(+)/debt(-) central government: -8.4 -5.4 -3.6 -2.2 -1.6 -5.0 - Government Deposits in the Banking System (Percent of GDP): 46.2 43.2 50.9 54.0 50.0 43.3 ### Balance of Payments, 2012–21 (Table 4) — key figures preserved exactly (US$ billion) - Current account (US$ billion): 164.8 135.4 73.8 -53.5 -41.1 -18.9 -14.0 -9.2 -5.6 -2.6 - Current account (Percent of GDP): 22.4 18.2 9.8 -8.3 -6.4 -2.7 -1.9 -1.2 -0.7 -0.3 - Exports (US$ billion): 388.4 375.9 342.5 202.3 183.9 213.2 227.0 240.2 255.6 270.7 - Oil exports (US$ billion): 337.2 321.7 284.4 151.3 132.6 154.7 161.4 168.6 175.2 180.9 - Imports (f.o.b.) (US$ billion): -141.8 -153.3 -158.5 -155.0 -149.4 -157.6 -166.6 -175.6 -184.4 -192.7 - Services (US$ billion): -62.4 -64.8 -88.0 -75.7 -59.9 -58.3 -61.7 -61.3 -61.7 -63.2 - Financial account (US$ billion): -6.4 -57.4 -57.4 -42.0 -12.3 -10.4 -19.1 -18.0 -16.7 -15.2 - Net errors and omissions (US$ billion): -45.6 -8.6 -9.4 -20.0 -12.7 -12.7 -12.7 -12.7 -12.7 -12.7 - Overall balance (US$ billion): 112.6 69.2 6.6 -115.9 -66.0 -42.0 -45.8 -39.8 -34.9 -30.5 - SAMA's total net foreign assets (US$ billions): 647.6 716.7 724.3 608.9 542.9 500.9 455.1 415.3 380.4 349.9 - WEO oil price (US$/barrel): 105.0 104.1 96.2 50.8 43.9 51.0 53.0 55.1 57.0 58.5 - Average Saudi oil price (US$/barrel)3: 109.4 105.4 95.7 49.8 43.1 50.1 52.0 54.0 55.9 57.5 - Oil production (mbd): 9.8 9.6 9.7 10.2 10.2 10.3 10.4 10.5 10.5 10.6 ### Monetary Survey, 2012–21 (Table 5) — selected levels (SAR billions) - Foreign assets (net): 2,562 2,824 2,875 2,509 2,251 2,084 1,902 1,743 1,602 1,478 - Claims on private sector: 999 1,124 1,256 1,372 1,454 1,531 1,621 1,716 1,807 1,901 - Money and quasi-money (M3): 1,394 1,545 1,729 1,773 1,812 1,873 1,950 2,040 2,127 2,216 - Ratio of M3-to-GDP: 50.6 55.4 61.2 73.2 74.7 71.8 69.7 69.1 68.6 68.2 - Ratio of Claims on private sector-to-non-oil GDP: 73.8 76.0 78.2 79.2 79.8 80.4 78.8 79.0 79.0 79.0 ### Fiscal Assumptions in the Baseline and Adjustment Scenarios (Table 6) - Baseline scenario assumptions: - Based on policies in the 2016 budget and other policies with announced implementation schedule. - Oil revenues projected using the WEO oil price assumptions and forecast oil export volumes; share of total oil revenues transferred from Aramco to the budget returns to historic average over medium-term. - Revenues from higher energy and water price reforms estimated at SAR 28 billion in 2016 and assumed to accrue to the budget via Aramco. - Non-oil revenues assumed to increase in line with non-oil GDP except: (i) transfers from SAMA and PIF; (iii) an assumed transfer of SAR25 billion from HRDF in 2016; and (iii) some increase in fees and fines to a total of SAR 28 billion by 2021. - Excise taxes on tobacco and sugary drinks assumed introduced at beginning of 2017 and a VAT (5 percent rate) at beginning of 2018, with first-year collections lower. - 2016 expenditures assumed in line with the budget; 13th month wage payment and delayed contractor payments assumed met within budget envelope; Spending of SAR 25 billion from the budget surplus fund assumed. - From 2017–2021, all expenditures except wages and salaries grow in line with non-oil GDP; wages and salaries grow in line with inflation and 1 percent employment growth assumed; 13th month salary paid in 2018 and 2021. - Adjustment scenario assumptions: - Targets a balanced budget by 2021 (objective set out in Vision 2030 and the NTP). - Energy and water prices assumed to gradually increase to international or cost recovery levels by 2021. Compensation to households SAR 65 billion reflected in expenditure; additional government expenditure on energy prices excluded from revenue gains and long-term corporate contracts honored. Net revenue gains (baseline plus adjustment) estimated to reach SAR 173 billion by 2021. - Capital spending reduced to about 6.5 percent of GDP in 2021. - Growth in nominal government wage bill limited to 2 percent a year. - Additional spending on the national transformation plan (SAR 270 billion during 2016-2021) assumed to be met within the expenditure envelope of the adjustment scenario. ### Financial Soundness Indicators, 2007–15 (Table 7) — selected indicators preserved exactly - Number of licensed banks: 22.0 22.0 23.0 23.0 23.0 23.0 24.0 24.0 24.0 24.0 - Total assets (percent of GDP): 69.0 66.8 85.2 71.6 61.5 63.0 67.8 75.4 90.2 - Credit to private sector (percent of GDP): 35.8 36.6 44.0 37.6 30.0 34.9 38.6 42.6 54.0 - Gross NPLs to gross loans: 2.1 1.4 3.3 3.0 2.2 1.7 1.3 1.1 1.2 - Total provisions to gross NPLs: 142.9 153.3 89.8 115.7 132.8 145.1 157.4 182.9 164.4 - Average pretax return on assets: 2.8 2.7 1.9 2.0 2.1 2.1 2.0 2.0 2.0 - Return on equity: 22.3 20.5 14.2 13.6 15.0 15.1 14.6 15.0 14.5 - Liquid assets to total assets: 21.7 22.0 25.3 24.8 23.7 23.7 21.6 22.3 17.5 - Stock market capitalization (percent of GDP): 124.8 47.4 74.3 67.1 50.6 50.9 62.8 64.0 64.4 - Overall stock market price index (change in percent): 39.1 -56.5 27.5 8.2 -3.1 6.0 25.5 -2.4 -17.1 *Source: Excerpt from IMF staff report content as provided.* ### Appendix I. Saudi Arabia’s Corporate Sector ### Appendix I. Saudi Arabia’s Corporate Sector ### Overview - Listed Saudi corporate net income shrank by 25 percent in 2015 as low oil prices began hurting the wider economy. - Petrochemical producers’ net income fell sharply by 37 percent in 2015. - Many cement and real estate companies’ profits were hampered by the reduced number of government contracts in 2015; retail sectors’ net income slowed. - The construction sector showed some recovery after a much harder 2014. ### Balance sheet sample and key statistics - A sample of 119 listed Saudi companies’ balance sheets is analyzed. - Cash balances exceeded short-term debt by $1.5 billion in 2015 (in aggregate for the sample). - Total debt captured in this sample is $116 billion in 2015 (18 percent of GDP). - “Debt at risk” (debt of firms with an ICR less than 1.5) is about $36 billion in 2015. - Petrochemical industries account for about 72 percent of total debt at risk. - Losses in several big petrochemical companies pushed the ratio of debt at risk to total debt up to 31 percent from 17 percent in 2014. ### Earnings and interest coverage - Debt service capacity: interest coverage ratio (ICR) generally higher than 2 in most sectors, though narrowing profits are driving the ratio down for petrochemical, real estate and industrial investment companies. - Median ICR for all sample firms stands at about 10. - Median ICR for the 30 largest firms (top 25th percentile of the sample by asset size) is about 5. ### Stock market valuation - With the sharp drop in equity prices, the TASI’s price to earnings (P/E) ratio fell below its historical average since the second half of 2015. - A combination of higher oil prices and positive sentiment related to the announcement of the “Saudi Vision 2030” helped with a stronger performance of TASI and a rebound in the P/E since early 2016. - Compared with several regional and emerging markets indices, the TASI P/E ratio remains on the higher side. ### Stress-testing: scenarios and main results - Sensitivity analysis under three scenarios of corporate earnings and borrowing costs shocks: - Scenario 1: a 70 basis point increase in borrowing costs (in line with the observed increase of SIBOR from end-2014 to end-2015) and 16 percent decrease in corporate’ earnings (actual changes from 2014 to 2015). - Scenario 2: a 150 basis point increase in borrowing costs and 20 percent decrease in earnings given the potential impact of lower government spending and the recent downgrade of Saudi Arabia’s credit rating. - Scenario 3: an extreme scenario with a 300 basis point increase in borrowing costs (in line with the standard deviation of SIBOR from 1993 to 2016) and 38 percent decrease in earnings (largest annual change in the past 10 years observed in 2009). - Key stress-test outcomes: - The nonfinancial corporate sector shows moderate vulnerability to these shocks, with exposures and impacts varying between sectors. - The median ICR drops, but remains above 2 under all scenarios. - About half of the total debt will be at risk under the scenarios, most of which will be in petrochemicals, telecommunications and multi-investment sectors. - Industrial investment companies, which have low levels of ICR to begin with, will also be hit; their debt accounts for more than 30 percent of total debt at risk after the shocks. ### Corporate bond issuance and rollover risks - Over 70 percent of total Saudi corporate bond issuance since 2003 is concentrated in the petrochemicals, utilities, real estate, and food sectors. - Petrochemical and real estate companies have approximately $8 billion principal repayments due over the next five years. - The maturity profile for utilities and food companies is spread out over a longer period, implying lower near-term principal rollover pressure for those sectors. *Source: IMF staff analysis in Appendix I. Saudi Arabia’s Corporate Sector.* ### 2.7 percent compared to 3.3 percent on liabilities during 2014-2015. ### _cr16326 - 2.7 percent compared to 3.3 percent on liabilities during 2014-2015. ### REER, NEER, and terms of trade - The Riyal has been pegged to the U.S. dollar at a rate of 3.75 since 1986. - The real effective exchange rate (REER) has appreciated by nearly 18 percent since July 2014. - The nominal effective exchange rate (NEER) has appreciated by 12 percent since July 2014. - The terms of trade fell by 43 percent in 2015. - The REER is 22 percent above its long-run average. - As the U.S. dollar appreciated, the NEER and REER strengthened by 14 percent and 18 percent respectively since July 2014. - The REER is currently 22 percent above its average over the past decade. ### External sustainability and current account norms (external sustainability approach) - Underpinning approach: NPV of all future oil and financial/investment income (wealth) should equal NPV of imports of goods and services net of non-oil exports. - Assumptions used in staff projections (excerpted): - Proven oil reserves at end of 2015 were 258 billion barrels. - Oil production grows at a constant rate (2 percent) due to domestic consumption, peaks at 12.9 million barrels in 2029 and then remains constant until oil production stops. - Oil exports remain unchanged. - Oil prices increase by 2 percent. - GDP deflator increases by 2.5 percent. - Real non-oil GDP grows by 5 percent after 2021. - Future oil revenues are nominally discounted at 6 percent (assumed rate of return on externally held financial wealth/NFA). - Population growth is 1 percent. - Current account norms (external sustainability approach): - Annuity real per capita current account norm: 6.5 percent of GDP. - Annuity real current account norm: 0.5 percent of GDP. - Actual current account balance in 2015: -8.3 percent of GDP. - Current account gaps (external sustainability approach): - Under annuity real per capita: -14.8 percent of GDP. - Under annuity real: -8.8 percent of GDP. - Fiscal balances under external sustainability approach: - Fiscal balance norm (annuity real per capita): 3.8 percent of GDP. - Fiscal balance norm (annuity real): -1.3 percent of GDP. - Actual fiscal balance: -15.9 percent of GDP. - Fiscal balance gaps: - Annuity real per capita: -19.7 percent of GDP. - Annuity real: -14.6 percent of GDP. - Staff note: These estimates are subject to considerable uncertainty and sensitive to parameter assumptions and choice of annuity. ### EBA-lite methodology estimates - Current account norm (EBA-lite) for 2015: 1.5 percent of GDP. - Actual current account level in 2015: -8.3 percent of GDP. - Current account gap (EBA-lite): -9.8 percent of GDP. - Policy gap identified by EBA-lite (difference between actual and desired fiscal policy): -7.4 percent of GDP. - Staff observation: EBA-lite does not fully account for specifics of oil-exporting countries (intergenerational savings needs). ### Current account trajectory and projections - Preliminary current account in 2015: deficit of 8.3 percent of GDP compared to a surplus of 9.8 percent of GDP in 2014. - Change driver in 2015: lower oil revenues (down by 14 percent of GDP) and weaker petrochemical prices. - CA deficit projected at 6.4 percent of GDP in the current year, narrowing to about 0.3 percent of GDP in 2021 (as oil prices increase). - Staff assessment: large negative current account (CA) gap; estimated gaps range from -9.8 percent (EBA-lite) to -8.8 and -14.8 percent (external sustainability approach). ### Foreign assets, liabilities, and reserves - Net external assets estimated at 109 percent of GDP at end-2015. - External assets: 154 percent of GDP. - External liabilities: 45 percent of GDP. - Net external assets declined by 12 percent of GDP during 2015. - Projections: NIIP-to-GDP ratio will decline further under current oil price baseline and fiscal policy but remain above 60 percent of GDP in 2021. - Reserves at end-2015: $609 billion. - Equivalent metrics at end-2015: 94 percent of GDP, 32 months of imports, and 700 percent of the IMF’s reserve metric. - Reserves fell by $115 billion during 2015. - Despite drawdown, reserves remain very comfortable by standard Fund metrics; however, under current fiscal policy settings and low oil prices, reserves will continue to decline over the medium term. ### Reserve adequacy metrics (selected figures, as reported) - Foreign Reserves in percent of GDP (series shown): 83.6, 79.9, 88.2, 96.3, 96.1, 94.3, 84.0, 72.0, 61.0, 52.8, 46.0, 40.4. - Foreign Reserves in percent of broad money (series shown): 153, 164, 174, 174, 157, 129, 112, 100, 88, 76, 67, 59. - Foreign Reserves in 3 months of imports of goods and services (series shown): 8.9, 9.9, 11.3, 11.1, 11.8, 10.8, 9.3, 8.1, 7.1, 6.3, 5.5, 4.9. - ARA metric and Foreign Reserves as a % of the ARA metric (series shown): ARA metric (in billions of USD) 698, 392, 959, 987, 921, 1,021, 1,081, 1,151, 1,211, 1,128; Foreign Reserves as a % of the ARA metric (in percent) 637, 641, 704, 755, 732, 698, 591, 493, 422, 362, 313, 273. - Note: As a rule of thumb, reserves within 100-150 percent of the new ARA metric are considered adequate. ### Impact of a 10 percent exchange rate depreciation (2016 estimates) - Trade balance effects (semi-elasticity, percentage points of GDP): - Using import volume elasticity of -0.09 and non-oil export volume elasticity of 0.67 (Hakura and Billmeier 2008), a 10 percent depreciation in 2016 would improve the goods and services balance by 0.6 percentage points of GDP. - Using a higher import volume elasticity of -0.24, the goods and services balance would improve by 1.1 percentage points of GDP following a 10 percent depreciation. - Fiscal impact scenarios (2016, SR billion; GDP = 2,424 SR billion): - Baseline (no depreciation): - Revenue Total: 551 - Oil revenue: 343 - Nonoil revenue: 208 - Expenditure Total: 865 - Wages: 409 - Goods and services: 168 - Capital: 208 - Others: 80 - Fiscal Balance: -314 - Balance/GDP: -13.0 - Scenario 1 (10% depreciation, assume no change in nominal expenditure): - Revenue Total: 588 - Oil revenue: 377 - Nonoil revenue: 210 - Expenditure Total: 865 - Fiscal Balance: -278 - Balance/GDP: -11.4 - Estimated improvement in fiscal balance: about 1.5 percent of GDP in 2016. - Scenario 2 (10% depreciation, allow nominal expenditures to rise assuming a 50 percent pass-through of higher relative prices on nominal expenditure; assume 50 percent share of imports in non-oil GDP): - Revenue Total: 588 - Oil revenue: 377 - Nonoil revenue: 210 - Expenditure Total: 905 - Wages: 429 - Goods and services: 176 - Capital: 218 - Others: 80 - Fiscal Balance: -317 - Balance/GDP: -13.1 - Under this scenario the fiscal balance worsens by 0.1 percentage points of GDP compared with baseline. - Staff conclusion: Exchange rate depreciation is likely to have a small impact on the current account given limited substitutability between domestic and imported goods and the significant imported content of domestically produced goods and services. ### Overall assessment and policy recommendations - Overall assessment: - The external position in 2015 was substantially weaker than suggested by fundamentals and desirable medium-term fiscal policy settings. - External adjustment will be driven by fiscal policy rather than the exchange rate, given the economy’s structure (exports dominated by oil; limited substitutability between imports and domestically produced goods). - The external balance sheet remains very strong at present despite the substantial drawdown in 2015. - Under current fiscal policy settings and low oil prices, reserves will continue to decline over the medium term. - Potential policy responses recommended by staff: - A substantial and sustained fiscal consolidation is necessary to strengthen the current account over the medium-term and support the exchange rate peg. - The government should set out a credible medium-term fiscal consolidation plan based on: - Further energy price reforms. - Non-oil revenue measures. - Continued expenditure compression. - Fiscal adjustment should be supported by reforms to strengthen the fiscal framework. - Closing the large fiscal gap would largely eliminate the current account gap. *Source: IMF staff calculations and country authorities (document _cr16326).* ### APPENDIX IV. THE RESILIENCE OF SAUDI BANKS TO LOWER ASSET ### APPENDIX IV. THE RESILIENCE OF SAUDI BANKS TO LOWER ASSET QUALITY AND DEPOSIT WITHDRAWALS ### Asset quality scenarios - Method: Using the same parameter estimates as in IMF (2015) and the most recent projections of oil prices and nonoil private sector GDP growth, the future estimated path of bank-level NPLs is derived. Three scenarios are considered. - Scenario I: - Oil prices: decline from an average of $50 a barrel in 2015 to $43 a barrel in 2016, and recover to $56 a barrel in 2020. - Nonoil private sector GDP growth: moderates from 3.4 percent in 2015, to 2.1 percent in 2016 and recovers to 4 percent in 2020. - Bank provisioning: new NPLs are assumed to be provisioned at 120 percent (above regulatory requirements of 100 percent). - Scenario II: - Oil prices: fall from $50 a barrel in 2015 to $32 a barrel in 2016 and recover to $36 a barrel in 2020. - Nonoil private sector GDP growth: declines into negative territory in 2016, before recovering to 1.5 percent in 2020 (these are 1 standard deviation below the levels assumed in Scenario I, respectively). - Bank provisioning: banks provision 100 percent of new NPLs. - Scenario III: - Purpose: estimate the extent of a growth slowdown needed to reduce the average capital ratio to 12 percent in 2020. - All assumptions other than the trajectory of nonoil private sector GDP growth remain unchanged. ### Asset-quality simulation results (by scenario) - Scenario I results: - Aggregate NPL ratio rises to 3.9 percent by 2020. - Aggregate capital ratio remains above 18 percent. - Provisions: 120 percent of new NPLs provisioned, maintaining provisions at above 130 percent of total NPLs. - Scenario II results: - NPL ratio rises to 10 percent by 2020. - Provisions cover about 1.1 times the stock of NPLs in 2020. - Profitability declines and provisioning needs increase. - Aggregate capital ratio remains at around 14 percent. - Bank-level impact: for five banks, the capital ratio declines below 12 percent but remains above the 8 percent international regulatory minimum. - Resources required to bring the 5 banks’ capital ratios back to 12 percent: equivalent to 0.2 percent of GDP (about SAR 5 billion). - Scenario III results: - To push the average capital ratio to 12 percent, nonoil private sector GDP growth would need to contract by about 4 percent in 2016 and 1 percent in 2017, respectively, before recovering to 1.5 percent in 2020. - NPL ratio would increase to about 14 percent in 2020. - Bank-level impact: capital ratios would fall below 12 percent for 7 banks, of which 4 banks would maintain capital ratios above 8 percent. - Resources required to bring the 7 banks’ capital ratios back to 12 percent: equivalent to 0.8 percent of GDP (about SAR 22 billion). - Summary conclusion: - Simulation results suggest that Saudi banks can generally withstand higher NPLs and lower profits under the economic scenarios considered. ### Liquidity scenarios - Method: Investigate banks’ ability to accommodate deposit reductions by selling liquid (and to some extent illiquid) assets within a 30-day window (divided into five periods, six days each) using the same parameter values as in IMF (2015) and end-2015 bank balance sheet data. Two scenarios are parameterized to calibrate Saudi Arabia’s historical experience, guided by Schmieder et al. (2012). - Scenario A (historical-calibrated, milder): - Deposits: demand and time deposits decline by 2 percent and 1 percent per period, respectively, or by an average of 8 percent over the 30-day period. - Note: This is higher than the largest monthly decline seen since 1993 which was 6 percent. - Asset availability and encumbrance: - 10 percent of liquid assets are encumbered (25 percent of illiquid assets). - 95 percent of the remaining liquid assets are available for sale in each 5-day period (2 percent for illiquid assets). - Haircuts: liquid assets sold with a 1 percent haircut (15 percent for illiquid assets). - Scenario B (faster run, tighter market liquidity): - Deposits: decline by more than 10 percent during a 30-day window (a rate similar to the 11 percent reduction within a week seen in 1990). - Asset availability and encumbrance: - 85 percent of liquid assets and 1 percent of illiquid assets available for sale. - Encumbrance: 20 percent for liquid assets and 50 percent for illiquid assets. - Haircuts: 5 percent for liquid assets and 30 percent for illiquid assets. ### Liquidity simulation results - Aggregate system: - Scenario A: no liquidity shortfall for the banking sector as a whole or for any individual bank. - Scenario B: the aggregate banking system remains liquid, but four banks suffer liquidity shortages by 1-3 percent of initial assets (banks # 4, 8, 10, 12). - Individual-bank outcomes: - Scenario A: net cash flows remain non-negative across all banks after the 30-day window. - Scenario B: specific bank-level shortages emerge for four banks noted above. ### Notes on analysis scope - The purpose of this analysis is to explore the resilience of the banking system in Saudi Arabia under alternative macro-financial scenarios. - These are not detailed stress tests as conducted in the 2011 FSAP Update, nor do they preempt those that may be carried out in a future FSAP. *Source: Bankscope, Haver, IMF WEO, and IMF staff estimates.* ### Introduction of VAT and Excises: Key Policy Design Issues, May 2016. ### Introduction of VAT and Excises: Key Policy Design Issues, May 2016 ### Mission activity and timelines - Tax Administration (VAT), May 17–30, 2016. - VAT Policy design, May 30–June 12, 2016. - FSAP main mission: January 2004. - FSAP-update: April 16–30, 2011. - FSSA published: June 5, 2006. - FSSA-update published: April 18, 2012. - Detailed Assessment of Observance published: July 19, 2013. - AML/CFT Diagnostic Mission: November 1–12, 2015. - AML/CFT threat analysis workshop: March 6–10, 2016. - No resident representative is stationed in Saudi Arabia. ### Relations with the World Bank Group — overview of engagement areas - World Bank Technical Cooperation Program (TCP) advising Saudi Arabia since 1975 on a reimbursable basis. - Reimbursable Advisory Services (RAS) objectives: - Generating productive jobs for a fast growing population. - Improving performance of education and health systems. - Improving business climate and investment appeal. - Enhancing provision of public services including water, electricity, and transport. - Strengthening capacity in national, municipal institutions, and tourism. - Ongoing advisory work areas include: - Public financial management. - Business climate and foreign direct investment. - Small and medium enterprise strategy. - Urban development and city institutional strengthening capacity building. - Poverty and social protection issues and employment policy including unemployment assistance. - Enhancing quality and relevance of the education system. - Health sector efficiency. - Energy efficiency; electricity sector legislation and policies. - Developing an implementation plan for the national ports strategy. - Advising on the financial and economic cost/value of water resources. - Advice and support to implementation of the national transport strategy and creation of the Public Transport Authority. - International Finance Corporation (IFC) objectives and activities: - Promoting Selective Business in Saudi Arabia: - Invest in selective transactions that add value via institution building, new financial instruments, and SME development. - Specific investments in the financial sector include housing finance, insurance, leasing and microfinance (with total commitments of around $200 million). - Advisory services in mortgage finance, SME finance, corporate governance, risk management, and PPP transactions. - IFC PPP engagement includes Taif Airport and King Abdul Aziz International (Jeddah) Airport mandates signed in FY14; prior work includes Medina Airport PPP (mobilized over $1 billion), Hajj Terminal, and a captive desalination project at Jeddah Airport. - Promoting South-South Investments from Saudi Arabia: - Since 2007, IFC mobilized around $2 billion from Saudi sponsors for investments in MENA and other emerging markets. - Mobilizing Funds: - IFC efforts with Saudi public institutions and IFIs have obtained commitments of over $1 billion. ### Statistical issues — data adequacy and gaps (As of June 14, 2016) - Overall assessment: - Data provision has some shortcomings, but is broadly adequate for surveillance. - Most affected areas: labor markets, government finance statistics, monetary and financial statistics and external sector statistics. - Real sector statistics: - National accounts: GDP rebased to 2010 from 1999; revision increased coverage of services (distribution and financial services) and resulted in upward revisions to the level of GDP and activity contributions. - Rebasing increased the share of the oil GDP in 2013 to 43 percent from 21 percent previously. - Price statistics: wholesale price index weight reference period appears outdated (1988) and should be updated ideally at least every five years. - No official real estate price series or other data on housing market activity; uncertainty about owner-occupation rates. - Labor markets statistics: - No official data providing a breakdown of employment between the private and public sector. - No official data on private and public sector wages and salaries. - Government finance statistics: - Authorities are reclassifying the budget in line with GFSM 2014; most chapters completed and Ministry of Finance plans to use GFSM 2014 framework going forward. - Monetary and financial statistics: - Quality of monetary data has improved; additional information published in the Saudi Arabian Monetary Agency (SAMA) Monthly Statistical Bulletin. - SAMA reported monetary data for the central bank and deposit money banks to the Fund (published in the IFS). - Authorities have not yet adopted the Standardized Report Forms (SRFs) recommended in the Monetary and Financial Statistics (MFS) Manual and Compilation Guide. - A TA mission on MFS took place in December 2015 to assist SAMA to migrate monetary data to the SRFs. - Mission medium-term recommendations targeted: 1. Improvements in the report form for commercial banks and recording practices for SAMA accounts. 2. Improving data dissemination formats to align with MFSM terminology and best international practices. 3. Extending coverage of monetary statistics to include other financial corporations (OFCs) with a view to compile a financial corporations survey (FCS) covering the entire financial corporations sector. - SAMA’s published balance sheet has a large and growing “other liabilities” item that hinders analysis. - SAMA reports quarterly financial soundness indicators (FSIs) to the IMF, published on the IMF’s FSI website; reported FSIs comprise 12 core FSIs and 8 encouraged FSIs for deposit takers. - External sector statistics: - Quarterly IIP data published but highly aggregated; coverage in capital and financial accounts, particularly for the private sector, needs improvement. - Official data likely substantially underestimates the net international investment position of Saudi Arabia, likely reflecting unrecorded private financial outflows on the asset side along with under-recording of debt liabilities. - Errors and omissions in balance of payments data remain large. - Authorities are working to strengthen financial account data; data on FDI flows and other investment flows are weak. - Inconsistencies between the BOP and IIP data. - Data Standards and Quality: - Participant in the General Data Dissemination System (now the enhanced GDDS) since 2008. - No data ROSC is available. ### Key data reporting schedule (Saudi Arabia: Table of Common Indicators Required for Surveillance, As of June 15, 2016) - Exchange rates: Date of latest observation 6/15/2016; Date received 6/15/2016; Frequency of Data D; Frequency of Reporting D; Frequency of publication D. - International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation 4/2015; Date received 5/29/2016; Frequency of Data M; Frequency of Reporting M; Frequency of publication M. - Reserve/base money: 4/2015; 5/29/2016; M; M; M. - Broad Money: 4/2015; 5/29/2016; M; M; M. - Central Bank balance sheet: 4/2015; 5/29/2016; M; M; M. - Consolidated balance sheet of the banking system: 4/2015; 5/29/2016; M; M; M. - Interest rates: Date of latest observation 6/15/2016; Date received 6/15/2016; Frequency of Data D; Frequency of Reporting D; Frequency of publication D. - Consumer price index: 4/2015; 5/24/2016; M; M; M. - Revenue, expenditure, balance and composition of financing—central government: Q1 2016; 5/8/2016; Frequency of Data Q; Frequency of Reporting Q; Frequency of publication A. - Stocks of central government and central government-guaranteed debt: 2015; 12/28/2015; A; A; A. - External current account balance: Q4 2015; 4/28/2016; Q; Q; Q. - Exports and imports of goods and services: Q4 2015; 4/28/2016; Q; Q; Q. - GDP/GNP: Q4 2015; 1/06/2016; Q; Q; Q. - Gross external debt (BIS): Q4 2015; Q; Q; Q. - International investment position: Q4 2015; 4/28/2016; Q; Q; Q. *Introduction of VAT and Excises: Key Policy Design Issues, May 2016.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16326.pdf_