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

IMF News, January 18, 2017

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IMF reduced its growth forecast for Saudi Arabia in 2017 from 2 percent to 0.4 percent.
Main driver of the downgrade: assumed contraction in oil GDP due to the OPEC Agreement and cuts in oil output.
Non-oil sector: expected a modest recovery in 2017, with non-oil growth around 2 percent.
Factors supporting non-oil pickup: rebound in private sector confidence after the sovereign bond issue, government payments of delayed obligations, and somewhat less fiscal consolidation in 2017 than in the previous two years.

Fiscal Balance Program aims to move the deficit to a broad balance by 2020; relies on containment of spending, new non-oil revenue measures (including a value-added tax and excises), and continuation of energy price reforms started in late 2015.
IMF view: plan is appropriate and aligned with prior IMF recommendations; critical challenge is timely implementation (legal and administrative preparation for measures like VAT).
IMF expects the fiscal deficit in 2017 to be less than 10 percent of GDP (no specific point estimate provided pending discussions with authorities).
2017 state budget projected oil revenues to rise 46 percent to 480 billion Reals; IMF expects considerably stronger oil revenues in 2017 than in 2016, assuming the OPEC agreement holds and given the rebound in oil prices.
IMF will use the $930 billion spending figure in its numbers (in response to comparison between $913 billion and $825 billion figures for 2016).

Saudi Arabia entered the oil-price decline with a strong financial position: large stock of government financial assets and very little public debt.
Government financing mix used in 2016–17: run down of central bank assets, domestic debt issuance to banks and pension funds, and issuance in international markets (sovereign bond).
IMF expects Saudi to continue using its range of financing options and notes strong demand for the recent international bond issue; government has indicated intent to tap international markets again.
Government plan referenced: increase debt level to 30 percent of GDP by 2020; IMF view: 30 percent of GDP is still low by international standards and Saudi debt should remain attractive given gross asset positions (central bank assets, PIF, and oil reserves).

SAMA responses to domestic liquidity tightening:
- Relaxed the loan-to-deposit ratio earlier in the year.
- Placed deposits with commercial banks.
- Broadened the range of repo facilities offered to banks.
Combined with sovereign bond issuance, these measures have contributed to a decline in interbank interest rates (three-month interbank rate fell in recent months).
If liquidity remains tight, SAMA can further use instruments such as raising the loan-to-deposit ratio or placing additional deposits with commercial banks.

Vision 2030 and the National Transformation Program set out plans to reduce dependence on oil, increase private sector employment for nationals, and expand the role of the Public Investment Fund (PIF).
IMF assessment:
- Diversification away from oil is difficult and requires sustained government and private-sector efforts over many years.
- Progress noted on fiscal transparency and capital market reforms; further implementation and broader sequencing/prioritization of reforms are now needed.
Key elements for boosting non-oil growth and employment:
- Education and training reforms to align skills with private sector needs.
- Policies to change incentives for nationals (shift from expectation of public-sector employment to private-sector and entrepreneurship opportunities).
- Measures to spur exports and encourage private-sector investment, including privatization efforts.
- Increasing female labor force participation is highlighted as an important avenue for raising employment.

Slower Saudi growth affects the region via reduced imports from Saudi Arabia and likely slower expatriate worker inflows and remittances; these effects are already visible in slowing or falling imports during the first three quarters of 2016.
PIF and other official investment channels may diversify overseas and could increase regional investment flows despite slower domestic growth.
On exchange rate regime: IMF maintains that the dollar peg remains appropriate for GCC countries given dollar-priced oil exports and the peg’s role in supporting investor confidence and monetary credibility; stronger dollar will have sectoral effects but peg continues to be judged appropriate.

Primary risk to the 2017 outlook: assumption that the OPEC production agreement holds through 2017; IMF assumed the deal holds for the year. If the deal ends, effects on Saudi growth and the budget would be state-dependent (would depend on output response and resulting oil price movements).
IMF recommended smoothing the pace of fiscal adjustment to avoid large negative impacts in any single year while meeting the medium-term goal of moving to a broad balance by 2020.
Policy priorities for 2017 and beyond:
- Implement the Fiscal Balance Program (legal and administrative readiness for VAT and excise taxes).
- Continue liquidity-support measures as needed via SAMA instruments.
- Prioritize and sequence structural reforms under Vision 2030 and the National Transformation Program, with emphasis on labor-market reforms, education/training, women’s labor force participation, capital market development, and privatization to boost private-sector employment and diversification.

IMF 2017 GDP growth forecast for Saudi Arabia: reduced from 2 percent to 0.4 percent.
Non-oil sector growth expected in 2017: around 2 percent.
Fiscal target: broad balance by 2020.
2017 state budget projected oil revenues: increase of 46 percent to 480 billion Reals.
IMF expectation for 2017 fiscal deficit: less than 10 percent of GDP.
Unemployment rate for Saudi nationals: around 12 percent.
Spending figures referenced for 2016: $825 billion, $913 billion (included overpayments), and IMF will use $930 billion in its numbers.
Government debt target mentioned: increase to 30 percent of GDP by 2020.

Transcript of the Press Conference on Key Economic Developments in Saudi Arabia — January 18, 2017, IMF Communications Department.