Transcript of the Press Conference on Key Economic Developments in Saudi Arabia

January 18, 2017

MS. AMR: Good morning, everyone; good afternoon to colleagues who are joining us from other parts of the world. This is a Press Conference on the Key Economic Developments on Saudi Arabia.

Tim Callen, Assistant Director and Mission Chief for Saudi Arabia, will make some opening remarks, and then we will take questions online and here in the studio. Thank you. Tim, the floor is yours.

MR. CALLEN: Thank you very much, Wafa. And good morning, or good afternoon to everybody. I'd just like to cover two issues up front, and then take questions we have in the room and online as well.

The first issue I wanted to cover is the growth outlook, and as you'll have seen in the World Economic Outlook Update that was released yesterday, we did reduce our growth forecast for Saudi Arabia in 2017, from 2 percent previously to 0.4 percent now. The main reason for that change in the outlook is the oil GDP, where, now because of the OPEC Agreement, and the cut in oil output, we assumed oil GDP will actually contract somewhat this year.

The non-oil sector we expect to grow, we downgraded that marginally, but we do expect a recovery in non-oil growth -- a modest recovery in non-oil growth this year. And that is because we've seen, I think, confidence rebound a little bit in recent months after the sovereign bond issue, the government has been now paying the delayed payments, so that I think has been positive for confidence. And then we are also expecting a little bit less of a fiscal consolidation (phonetic) this year, than over the previous two years. And that should also be somewhat supportive of the non-oil growth.

The second area, I just wanted to briefly cover, was what's been happening in terms of policy developments since the publication of our Article IV Report in October. Of course the mission was in May, and the report was discussed with the Board in July, and then published in early October.

Since that publication, I think the policies the Saudi Arabian Government has been following, have been broadly in line with the suggestions we had in that report. You'll have seen the fiscal balance program which was published at the end of last year, and that, I think, goes a long way to setting out a medium-term fiscal plan, which we've been calling for.

Also, the budget and the fiscal balance program, I think, substantially increased the transparency of fiscal policy, another area we've -- suggesting to the government. And this should really help the private sector in terms of understanding what the government's fiscal reform plans aare. And therefore this should boostinvestor confidence and private business confidence.

On the monetary side, SAMA has continued to respond to the tightening of liquidity that had been seen in the domestic market. Earlier in the year, they'd relaxed the loan to deposit ratio. They’ve now placed deposits with the commercial banks, and have broadened the range of repo facilities that they offer. I think together with the issuance of the sovereign bond, all of these factors have been behind the decline in interbank interest rates that we've seen over the last couple of months.

And then one last area to highlight is the capital market reforms that the CMA had beenundertaking, they’ve clearly continued, and we think that this is an important area where reforms can certainly help in terms of raising options for private sector finance, and increasing the range of options that savers in the domestic economy have.

So, with those brief remarks, I'll stop there and would be happy to take questions in the room or online. Thank you.

MS. AMR: Thank you, Tim. I would urge colleagues to send their questions online, those who are listening to us. We have several questions online. And I'd like to take a question from the studio first.

QUESTIONER: Thank you, Amr. Thank you, Tim. I would like to ask you, in light of the lower oil production and the recent -- the OPEC recent discussion. In light of this lower price, and spending cuts, adjusting taxes in Saudi Arabia, what's needed to be done to boost the non-oil sector and deal with the budget deficit? What's your advice to the government?

MR. CALLEN: Okay. Very good. Thank you. So, let me tackle the question with the budget deficit first, and then we can talk a little bit about non-oil growth.

So on the budget deficit, really the Fiscal Balance Program sets out a plan of moving the deficit to a broad balance by 2020, and it's going to be based on the containment of spending, new non-oil revenue measures such as introducing a value-added tax and excises on certain products. And then also the continuation of the energy price reforms that were started in late 2015.

We think all of those are the right way to be going and are consistent with what we've been recommending in our reports for the last few years. So we think the plan is in place, now the challenge is implementation of that plan. If I can, maybe just take one example, introducing the value-added tax, you know, that's something where there will beconsiderable legal and administrative work which is ongoing. But to successfully introduce such a tax it needs a lot of preparation.

So, I think now the challenge and the goal of the authorities is really to work on the administrative side and the legal side to introduce these reforms. So in a nutshell it's to go from, you know, planning of the reforms and outlining what they are going to do, which we think they’ve done very well in the balance program, to now implementing these reforms in a timely way.

On the growth side, I think, clearly oil and government spending had been a big driver of growth in the non-oil economy during the period of rising oil prices. Without that impetus to growth, the non-oil sector is now going to need to find other sources of growth, and I think really it's a question of changing the incentive sector within the economy. We think it's at the center of the reform plan set out in Vision 2030 and in the National Transformation Program.

And really going from an economy where, you know, most nationals used to think, first of all, about working in the public sector, to now thinking about working in the private sector or going into entrepreneurship. And one of the things -- that’s clearly going to be critical there -- is further reforms to education and training to make sure that people have the skills to go and work in the private sector.

And then from the company side, companies have been able to make nice profits in the past by servicing the government sector. Now they are going to have to look for other markets; whether it'swithin the country or overseas. So, I think particularly doing what can be done to spur exports, to encourage exports, is going to be very important in terms of developing the non-oil sector and non-oil growth going forward.

MS. AMR: Thank you. So, we'll take a question online. Do you think the reforms that Saudi Arabia is planning on its Vision 2030 Roadmap, and its National Transformation Program will be enough to wean the Saudi Arabia economy of its dependence on oil export revenues?" We have received several other questions from other journalists that are similar to this question.

MR. CALLEN: Okay. Thank you. So, in recent years, the IMF has been doing quite a lot of work on diversification in oil export countries, and I think one of the lessonsthat we took from that research is that it's very difficult to diversify, and it really requires very sustained efforts from both the government but also the private sector over a number of years to successfully diversify away from oil. So it’s very encouraging that the Vision 2030 has set out the plans to move away from oil to create employment for nationals in the private sector.

And more specific goals were then set out in the National Translation Program but what’s really now needed is to go to the implementation stage of these reforms.

We’ve seen a lot of implementation on the fiscal side. I think we’ve seen quite a lot of implementation in terms of reforms to develop the capital markets but it’s now time to broaden those reforms further. Clearly the government is working on a privatization plan. I think that would be one important element of this push, but it’s really going to be now important to identify the reforms and prioritize and sequence the reforms that are going to be critical for this move towards a greater reliance in the non-oil sector.

Again, I think at the heart of this, it’s really changing the incentives both for Saudi companies and Saudi workers that I address in the first question.

MRS. AMR: Okay, great, thank you. We have a question online. Given the expected annual growth and rise in oil prices, is there room for Saudi to ease the pace of spending cuts to stimulate the economy in 2017?

Another question is what’s your budget deficit forecast in 2017?

MR.CALLEN: Okay, so let me take the budget deficit forecast first of all. I don’t, at this stage, want to put a specific number on the fiscal deficit in 2017 because we’ll be going to Riyadh next to discuss with the authorities the fiscal balance program and other issues in the reform program and before we finalize our fiscal deficit projection for this year, I want to have those discussions. But what I can say is we would expect it to be less than 10 percent of GDP this year.

In terms of expenditure reduction, we think based on the budget, it’s probable that the pace of expenditure reduction that we’ve seen in 2015 and 2016 will ease in 2017.

What we’ve been emphasizing on the fiscal side is the pace of adjustment should be gradual. You know, reaching a balanced budget by 2020 or somewhere around there, we think is appropriate but over that period, the pace of adjustment can be smoothed so it doesn’t have a large negative impact on the economy in any one year.

I do think that the pace of expenditure adjustment would probably be slower going forward and that will be particularly the case as the emphasis moves to non-oil revenue measures and energy price reforms that we see coming in 2017, ’18 and beyond.

MRS. AMR: An online question. Was Saudi Arabia successful in issuing international bonds last year, should the international bond market this year, do you think it would attract this demand and pricing (sic)?

MR.CALLEN: Let me address that question in terms of the broader financing of the fiscal deficit. I mean it’s clear that heading into this decline in oil prices, that Saudi Arabia was in a strong financial position, they had quite a large stock of government financial assets, had very little public debt, so that’s really allowed it, over the past year or so to tap a whole range of financing options at its disposal so it’s run down its assets that it holds at the central bank. It has issued debt in the domestic market to banks and to pension funds and then clearly, it’s also raised money in international markets most recently with the sovereign bond issue.

We would expect going forward, the government will continue to use its range of financing options and we certainly think -- and I think the government itself has said that it is intending to tap the international market again this year. The demand for the issue last year was very strong and as long as financial conditions in global markets remain favorable, I would expect that demand would be strong again for such an issue.

MRS. AMR: Thank you, there is another online question on the dollar. Is the strong dollar an increasing concern for the dollar pegged gulf economies as ex-industries retain hospitality and to this outcome under pressure?

MR.CALLEN: On the exchange rate pegs, the position we’ve had is that the pegs remain appropriate for the GCC countries. The reason for that is we think the pegs give confidence to investors, both domestic and foreign investors. It gives credibility to monetary policy by being tied to the dollar.

And if you look at the structure of most of the Gulf economies, their exports are predominantly oil, which is priced in US dollars so we think that the peg remains appropriate for those and a number of other reasons. Now, of course, the appreciation of the dollar will affect some sectors of the economy, those in the non-oil sector but you know, every exchange rate regime will have its plusses and minuses in terms of the impact on the economy and while there will be effects in some sectors, we think overall the exchange rate remains appropriate to keep it as a pegged regime.

MRS. AMR: an online question. What is the impact of the slowdown in the Saudi economy on its regional investments and on aid given to other Arab states, what impact on other government states?

MR.CALLEN: Saudi Arabia clearly is a very important economy in the region, the economies in the region clearly benefitted when Saudi was growing very strongly through being able to sell more products into Saudi Arabia and through the increased hiring of workers in Saudi Arabia who then remitted their earnings back to the home country.

Now we would expect, as the Saudi economy slows, that those effects become less positive for the regional economy. We can already see in the balance of payments that imports have slowed and imports have in fact fallen over the first three quarters in 2016 and we would also expect, I think, that expatriate worker inflows into the country will slow and over time, remittances will probably either slow or even potentially decline a little bit so there will be impacts within the region. In terms of investments, it may well be the case that a private company will look again at foreign investment strategies.

I think one important thing also to bear in mind here is the reform programs the authorities are implementing. These see a much bigger role for the public investment fund, the PIF, and they are going to be looking to diversfy overseas so it may well be that we will see increased investments through other sources such as the PIF into the region.

MRS. AMR: Thank you. There is a question. The 2017 state budget projected oil revenues would soar 46 percent to 480 billion Reals in 2017 even though Saudi Arabia has pledged to cut its output under a deal with OPEC, do you feel the oil revenues target is realistic?

MR.CALLEN: So when we do our fiscal projections, we have assumed that the OPEC agreement will hold and that Saudi and of course, other OPEC members will cut their output as agreed. However, we’ve also seen a rebound in the oil price so on balance, despite the cut in the production, we do expect higher oil revenues in the budget this year. As I said before, we’re going to discuss these issues with the authorities next week. We will at that point I think have a better view on the exact number the authorities have in the budget. But it is certainly safe to say we do expect considerably stronger oil revenues in 2017 than we saw in 2016.

MS. AMR: We do have several questions asking about the forecast for non-oil economic growth in 2017.

MR. CALLEN: Okay so in the non-oil sector we are expecting a pick-up in growth probably to something around 2 percent this year and that is really on the base of a number of factors. One, we think we have seen a rebound in private sector confidence towards the end of last year since the sovereign bond issue. With now the government having set out quite clearly what its fiscal plans are over the medium term and with the deffered payments it had built up now being paid off and also higher oil prices which do seem to correlate with confidence in the non-oil economy as well. So ee are expecting a pickup in non-oil growth in 2017. Of course, it needs to be kept in mind that somewhere around two percent growth, while that is better than 2016 it is going to be less and is needed to meet the employment challenges that Saudi Arabia will be facing over the medium term and is certainly less than the economy has been used to in the decade prior to the drop in oil prices.

MS. AMR: Question: What has been the impact of Saudi led coalitions Yemen campaign on the Saudi economy and what is the IMF’s projection?

MR. CALLEN: If you look in the budget document the government published at the end of last year, you can certainly see in the military spending category that spending had exceeded the budget allocation in 2016. I don’t know whether that is due to the Yemen campaign or to other factors. Certainly, there does seem to be some pressure on the military spending.

MS. AMR: A journalist online is asking about more details on why the IMF slashed the growth forecast for 2017.

MR. CALLEN: So as I said at the beginning, really the main reason we’ve reduced the growth forecast in 2017 is because of the assumption that the OPEC oil production agreement holds and we therefore cut the assumption that we previously had in the WEO and the REO in October in terms of Saudi oil output in 2017 which feeds into the oil GDP and the national accounts. So we’re expecting oil GDP to decline this year relative to 2016. We also have somewhat lower growth in the non-oil sector than we previously had. It is still expected to pick up, but not quite as strongly as we previously expected. So it is mainly the oil sector with a little bit of non-oil and that’s the reason we’ve reduced the growth number from 2% recently to .4% for 2017.

MS. AMR: And another online question.What measures could be taken to offset the pressure on liquidity and possible fed hikes in 2017.

MR. CALLEN: SAMA has already taken quite a number of measures as I outlined in the beginning in terms of easing liquidity pressures. So they’ve been placing deposits of government entities in the commercial banks. They relaxed the loan to deposit ratio earlier in the year and they’ve also broadened the range of repurchase facilities available to banks from the central bank. All of this has, I think, together with the bond issue had a notable impact I think in terms of liquidity in the banking system and you see that in the decline in the three month inter bank rate in recent months. If liquidity remains tight going forward, I think SAMA basically has the same range of instruments that it can continue using to ease liquidity as needed. So particularly, there would be scope for the loan to deposit ratio to be increased or for further deposits to be placed with the commercial banks.

MS. AMR: Question: Can you give also more details on the main challenges that are facing the Saudi economy in 2017.

MR. CALLEN: Let me use this question to maybe say a little bit more about the employment challenges in Saudi Arabia. Clearly for nationals at the moment, the unemployment rate is already relatively high at around 12% and the young population is still growing and coming into their working years. They’re going to be looking for jobs. The public sector, has, in the past, been clearly a very important source of employment for nationals but with the fiscal adjustment that is going on and definitely needs to go on because of the lower oil price environment, the opportunities I think for public sector employment are going to be much less going forward than they were in the past. That indeed is outlined in the National Transformation Program. So if jobs are going to be created for Saudi nationals going forward they’re going to need to be increasingly in the private sector and that is going to need, I think, an employment strategy on how that is going to be achieved. We think one big focus needs to be on education and training where the government is already doing a lot of work and I think particularly in partnership with the private sector, working out how to give young Saudi’s the skills that are required in the private sector is going to be very important. The other thing in this area is how we get more women into the labor force. Women have very strong educational backgrounds and clearly can contribute very productively to the Saudi economy. So I think the whole area of labor market reforms and employment generation is going to be one of the critical issues not just in 2017 but over the median term.

MS. AMR: An online question. Does your forecast assume an end to the OPEC deal in June, how would an end to the deal effect Saudi growth and budget.

MR. CALLEN: We have assumed the deal holds through the whole of 2017 in our forecast. What would happen if that didn’t hold? Well, I think it would clearly depend on how the Saudi government responded. Presuming oil output increased then we would probably see stronger growth in the oil sector. On the budget, it would be difficult to tell because it will depend on what happens to oil prices as well. So you may have higher production but if oil prices drop you could still up with lower oil revenue in that situation. So it would be very state dependent.

MS. AMR: Some are also asking whether you can predict the forecast for non-oil economy, is it 2%.

MR. CALLEN: Yes in 2017 it’s around 2%.

MS. AMR: An online question. In 2016 which spending figure do you consider more reflective of reality, the $913 billion included over payments or the $825 billion that excludes them.

MR. CALLEN: We will take the $930 billion figure in our numbers.

MS. AMR: we have one last question from the studio.

QUESTIONER: Negative impact of the weaker growth. How attractive is this in the international markets especially with the government plan to increase the debt level to 30% of the economic output in 2020.

MR. CALLEN: Saudi debt will remain attractive even if the debt ratio goes up to 30% of GDP. That is still low by international standards. Of course, the government also has assets as well so that is a gross not a net debt figure. The government still has assets at the central and has assets through the PIF and of course it has huge oil reserves as well. So it has a very strong balance sheet so I think that means that the debt of Saudi Arabia will remain attractive to international investors.

MS. AMR: Any more questions here? So if there are no more questions, thank you very much, Tim. Thank you colleagues for coming to the studio and for colleagues who joined us from the rest of the world, and this ends our press conference on Saudi Arabia.

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