CONFIDENCE in Saudi Arabia's economy has carried through into 1997, in spite of a considerable fall in the price of oil since the winter. The sharp rise in state revenue recorded in 1996, largely due to unexpectedly strong oil prices in the second half of the year, allowed the government to redeem many of the debts owed to ministry suppliers. Sentiment was buoyed by the payments and much of the cash found its way into the local stock market, which ended the year 12 per cent up.
The proposed rise in state spending in 1997 was well-received in the business community and economists estimate that the government's budget plans are largely on-track in the year to date. It is to be hoped that arrears still owing to government contractors, particularly by the Health Ministry, will be paid this year, they say. A move to reduce the debts of some of the government companies would also be welcome. Several indications have emerged in recent months that the government is taking concrete action on a number of fronts to reform and liberalise the economy, all with the intention of encouraging real private sector growth.
However, a recent report from the IMF, which put real gross domestic product (GDP) growth at 2.5 per cent in 1996 compared to Finance Ministry estimates of 5 per cent, suggests that growth rates could be lower this year. In recent weeks, Finance Minister Ibrahim al-Assaf has said that real growth will approach 6 per cent. Independent analysts in Saudi Arabia incline more towards the IMF view and say that real growth of 2 per cent is a more realistic expectation this year.
The OPEC crude basket price fell from more than $24 a barrel at the start of the year to less than $17 a barrel in early April. Prices have since recovered and the OPEC basket was selling for $19 a barrel in late May. At these rates, the implied price for Saudi crude exports is around $17 a barrel. The budget appears to be based on a conservative oil price assumption of $16-16.50 a barrel.
However, due to normal commercial payment lags, income generated in late 1996, when prices were high, will appear on the books for 1997. This points to total oil export revenues of $26,000 million-27,000 million for the first half of the year, says Kevin Taecker, chief economist at Saudi American Bank (Samba). Even with no further improvement in prices, revenue received in the year will reach about $49,000 million, he says. This would be down just $2,000 million-3,000 million from 1996 and still leave some $5,000 million left over from other commitments, both on and off-budget, which could be used for payments still owing to contractors. Says Taecker: 'Viewed in another way, the price of oil could drop by more than $2 a barrel from here for the remaining six revenue months, through October, and the government could still meet its budget plans for 1997.'
Some analysts expect the recent firming of prices to be temporary. The Centre for Global Energy Studies (CGES) in London predicts an OPEC basket price averaging $17 a barrel for the second half of the year. If OPEC crude drops below $16 a barrel at any time, as the above prognosis suggests that it might, Riyadh's income projections would be affected. The main reason for pessimism about prices is the build up of supply, from non-OPEC and OPEC producers outside the Gulf in particular, at a time when the market doesn't need it. There is also some uncertainty about Saudi oil production. Some analysts suspect up to 600,000 barrels a day (b/d) is being pumped over and above the country's long-standing 8 million b/d OPEC quota. Others say 150,000-180,000 b/d is a more likely figure.
Those analysts more bullish about the market say the summer driving season in the US, which boosts gasoline demand from late May, allied to tight inventories, could push up prices. In addition, demand may actually be significantly higher than reported, particularly in emerging market economies.
Further economic reforms have emerged in recent months. The initiatives imply an acknowledgement of the consequences of running a high deficit and an acceptance that structural imbalances are unlikely to be eliminated by high oil prices alone. In addition, there appears to be an awareness that a policy of government spending restraint, though laudable in itself, will not be sufficient to sustain growth and investment. Many economists say there is now a dynamic to the policy of opening up to the private sector.
Leading items on the government's agenda include:
Accession to the World Trading Organisation (WTO). Joining the WTO should result in freer access to world markets for Saudi oil and petrochemicals exports. It will also entail reviewing the country's entire trade regime. Intellectual property and investor rights have been prominent in negotiations so far. Progress is also expected on liberalisation of the financial services sector. The implications for brokerage, insurance and commercial banking activities remain unclear at this stage. The third round of formal talks was held at WTO headquarters in Geneva from 29-30 May.
Stock market reform. In one of the most significant decisions effecting the stock market this decade, the Saudi Arabian Monetary Agency (SAMA - central bank) has recently given the go-ahead for the first fund investing in local equities which will be open to non-GCC nationals. Further details of the closed-end Saudi Arabian Investment Fund to be launched by Saudi American Bank (Samba) and listed on the London Stock Exchange are eagerly awaited. The size of the fund, expected to be in the range of $100 million- 250 million, will make very little impact on the market as a whole, which is capitalised at about $48,000 million. It is, however, an important first step. Capital markets reform is seen by many economists as the key to economic reform. Analysts say reform would ideally involve creation of an independent body to regulate the market. At present, the Commerce Ministry values companies wishing to list, and SAMA monitors share trading. Potential foreign investors will wish to see a legal system put in place that recognises the rights of investors in full. At present, only 70 stocks are quoted and many are effectively closed joint-stock companies, with large blocks of shares unavailable for trade. The challenge is to create the conditions that will bring some of the country's larger family-run companies to the market.
Tax reform. Finance Minister Ibrahim al-Assaf has said the tax code will be altered to allow local and international companies to compete on equal terms. At present, Saudi and GCC nationals pay zakat, a modest wealth tax. It is assessed in proportion to the equity stake of Saudi and GCC nationals in any business. The rate of zakat is 2.5 per cent of capital employed less the amount put into fixed assets, long-term investments and deferred costs. Corporate taxes on foreign companies, after a tax holiday for joint ventures, are applied to the portion of income attributable to the foreign partner, excluding GCC nationals. Rates range from 25 per cent on the first SR 100,000 ($27,000) to 45 per cent on amounts more than SR 1,000,000 ($270,000).
Privatisation of port and airport operations. The government has recently approved recommendations submitted by the Saudi Seaports Authority (Seapa) for a systematic privatisation of port operations, maintenance, and management. Private operators will now derive income from stevedoring fees and pay a proportion in royalties to Seapa. The first two contracts have already been awarded. Plans for the ports could also come to include provision of long-term bonded areas and acceptance of transit and transhipment cargoes (see page 37). A similar plan for the airports has yet to emerge.
Unbundling the Saudi Consolidated Electric Companies (Scecos). In late March, Industry & Electricity Minister Hashim Yamani unveiled details of a far-reaching review of the power sector that could lead to the abolition of the four regional Scecos and private sector participation in future entities for generation, transmission, and distribution (see Page 34).
Commercialisation and privatisation of government companies. Saudi Arabian Airlines began an extensive corporate restructuring in 1996 and will be a prime candidate for privatisation once it is operating on a commercial basis. Non-payment of debts and the loss-making domestic service are two of the major issues to be addressed.
Reduction of the state holding in Saudi Basic Industries Corporation (Sabic). The government has recently raised the possibility of offering 30 per cent of its shares in Sabic to the public. The move, which is long- awaited, would reduce the state's holding in the highly-profitable petrochemical and industrial giant to 49 per cent. Analysts anticipate a sale within three years, possibly within one.
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