House Oversight — Estate records
HOUSE_OVERSIGHT_016111
GEMs Paper #26
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GEMs Paper #26 Saudi Arabia: beyond oil but not so fast 30 June 2016 Corrected Unauthorized redistribution of this report is prohibited. This report is intended for amanda.ens@baml.com Transforming Saudi Arabia, but challenges abound The Saudi National Transformation Plan (NTP) bodes well for comprehensive reform efforts to diversify the economy in line with Vision 2030. The NTP a) identifies key sectors with high growth potential; b) starts to articulate supportive public sector industrial strategies; and c) seeks to foster higher value-added through enhancements to processes, products and organizations. Still, ambitious targets in a number of sectors are unlikely to be reached and medium-term macro sustainability is not yet clear. USD peg holds but NTP inconsistent with stable FX policy Our view is still that the USD peg holds. However, the NTP provides a mixed message. On the one hand, it blurs policymaking incentives given the need for a competitive Fx if diversification progresses. On the other, unrealistic fiscal targets mean consolidation is likely to fall short of easing imbalances materially without oil price recovery. Energy policy thus likely needs to become less aggressive to support macro and FX policies. Eurobond premium required for fiscal slippage risk We expect large and regular sovereign Eurobond issuance to support FX reserves and domestic liquidity but to weigh on regional bond spreads if risk appetite does not hold up or fiscal balance slips. EMBIG index inclusion is unlikely, in our view. Saudi forwards, CDS and rates are likely to stay under pressure due to issuance and tight liquidity. Commodities: NTP adds to medium-term oil tightness The NTP suggestion that production capacity is maintained until 2020 reinforces our conviction of medium-term oil market tightness. The NTP gas production target that could displace domestic crude demand and boost export capacity is challenging. Equity Strategy: six investible themes on the back of NTP We see […]