Positive IMF assessment seen as vote of confidence in Saudi reform strategy

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The King Abdullah Financial District station highlights the Kingdom’s focus on developing the non-oil economy. (AFP)
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The King Abdullah Financial District highlights the Kingdom’s focus on developing the non-oil economy. (AFP)
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Metro lines in Riyadh are also being modernized as part of Vision 2030. (AFP)
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A worker at the Bin Salman farm picks Damascena (Damask) roses to produce rose water and oil, in the western city of Taif, on April 11, 2021. (AFP)
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The IMF report came as an endorsement of the Kingdom’s plans to diversify its economy and invest in non-oil sectors such as tourism and entertainment. (AFP)
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Jeddah's seaside corniche has been extensively redeveloped. (AFP)
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The oil sector, far left, has benefited from the Kingdom’s role in rebalancing global markets through OPEC+. (AFP)
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Work on the exterior of the King Abdullah Financial District station of the Riyadh Metro in full swing on April 1, 2021. (AFP)
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Updated 10 May 2021

Positive IMF assessment seen as vote of confidence in Saudi reform strategy

  • Latest assessment of the Kingdom’s economy is a vindication of Vision 2030 and the pandemic response
  • IMF has the power to deliver a positive or negative verdict on the way the economy is being run

DUBAI: Economic policymakers sometimes feel a little edgy when the International Monetary Fund (IMF) comes to town.

The 77-year-old global financial institution is not a regulator in the strict sense of the word, but it does have the power to deliver a positive or negative verdict on the way those policymakers — ministers, central bankers, and officials — are running their economy.

In extreme circumstances, the IMF can approve or withhold potentially life-saving funds from an economy in crisis. In more normal conditions, its verdict can have a big influence on the international credit ratings all countries use when accessing global capital markets.

When the IMF “mission” finished its visit to Saudi Arabia last month, there must have been at least a sliver of apprehension among economic policymakers in the Kingdom as they awaited the IMF’s formal verdict on their handling of the pandemic and its related economic shocks in 2020.

The oil sector has benefited from the Kingdom’s role in rebalancing global markets through OPEC+. (AFP)

There was no question of resource-rich Saudi Arabia seeking IMF financial assistance, but as the organization had not carried out its usual annual visit in coronavirus-ravaged 2020, there was a lot of ground to cover after a year of radical policy changes to handle the sharp recession that followed the outbreak of the pandemic.

As it turned out, there had been no need for the Saudi officials to worry at all. The “concluding statement”, when it came last week, was a ringing vote of confidence in the way they had handled the huge challenges presented by the pandemic.

More than that, it was a firm endorsement of the Vision 2030 strategy to diversify the Kingdom’s economy away from oil dependency.

Independent economists were not surprised by the IMF’s positivity. Nasser Saidi, former chief economist at the Dubai International Financial Centre (DIFC), told Arab News: “The country has been proactive in rolling out a spate of reforms despite the pandemic and lower oil prices. The public health system has proven to be resilient.”

The IMF experts were categoric. “The authorities responded quickly and decisively to the COVID-19 crisis. Strict early containment and health mitigation measures limited cases and fatalities and the vaccination program has advanced well in recent months,” they said.

The IMF report came as an endorsement of  the Kingdom’s plans to diversify its economy and invest in non-oil sectors such as tourism and entertainment. (AFP)

The experts added: “Fiscal, financial and employment support programs introduced by the government and SAMA helped cushion the impact of the pandemic on businesses and Saudi workers.”

A major reason for this performance, the IMF visitors concluded, lay in the Vision 2030 reform plan that has been in place since 2016, aiming to modernize the Kingdom’s economy and create a more dynamic, entrepreneurial private sector to take the place of government spending as the economic driving force.

“Reforms under Vision 2030 have played a key role in helping the economy navigate the pandemic. Efforts to establish a robust structure of inter-agency coordination and governance, the growing digitalization of government and financial services, reforms to increase labor market mobility, and strong fiscal and financial policy buffers, all equipped the economy to manage the crisis,” the IMF said.

All the indicators are moving in the right direction. Real GDP growth is projected at 2.1 percent this year, representing a dramatic turnaround from the 4.1 percent decline in 2020. In the critical non-oil sector — the key measure of the success of the diversification plan — real GDP growth rebounded in the second half of 2020 and the signs are that this will continue in 2021.

Non-oil growth is projected by the IMF at 3.9 percent this year and 3.6 percent next. Inflation, often a prime concern for the IMF, will be a very manageable 2.8 percent next year, while unemployment — another key indicator for the diversification strategy — fell to 12.6 percent for Saudi nationals at the end of last year.

Moreover, the role Saudi Arabia has played in the OPEC+ cuts strategy to rebalance global markets will pay off this year and next, as oil GDP recovers to 6.8 percent growth next year when oil supply returns to normal at higher crude prices.

The Kingdom’s fiscal policymakers also got a slap on the back from the IMF. “The deficit widened in 2020 to 11.3 percent of GDP (4.5 per cent of GDP in 2019) as oil revenues fell and spending needs increased, and it was comfortably financed by new borrowing and the drawdown of government deposits.” The deficit will decline to 4.2 percent this year, the IMF said, lower than the official forecast.

Some of the controversial measures introduced during the pandemic, like the tripled VAT rate, as well as the removal of cost-of-living allowances and domestic-energy price subsidies, “are all important contributors to the planned fiscal adjustment and should not be reversed or delayed.”


3.9% Projected non-oil growth this year.

2.8% Projected inflation rate next year.

The work of the Ministry of Finance was recognized by the IMF. “Steps to continue to strengthen fiscal transparency are needed, including by publishing more detailed information in budget documents and broadening the coverage of fiscal data beyond the central government,” they said.

Mohammed Al-Jadaan, Saudi Arabia’s finance minister, appreciated the IMF’s praise. “Such results have been achieved despite the impact of the COVID-19 pandemic, fluctuations in oil prices, sharp economic fluctuations, declines in global demand, receding growth and other challenges that the Saudi government has risen to,” he said in response.

Saudi Minister of Finance Mohammed al-Jadaan. (AFP)

The IMF included the Kingdom’s financial and capital markets sectors in its praise. “The financial sector continues to be well-regulated and supervised by SAMA,” it said.

“Banks are well-capitalized and liquid despite a decline in profitability and a slight increase in non-performing loans (which remain low) over the past year.”

It added: “The impressive pace of equity and debt market reforms has continued under the guidance of the Capital Market Authority and the National Debt Management Center. These reforms are increasing capital raising options for companies and investment opportunities for savers.”

Saidi, the former DIFC chief economist, said: “Saudi Arabia’s fiscal prudence has to be complimented, in addition to the efficient tapping of debt markets and structuring of key energy infra structuring to finance deficits.”

On one crucial subject — the gradual erosion of Saudi Arabia’s foreign reserves under the impact of pandemic pressures and the need for continued investment in Vision 2030 initiatives — the IMF was sanguine. “The exchange rate peg continues to serve Saudi Arabia well given the current economic structure. SAMA’s foreign exchange reserves remain at very comfortable levels,” it said.

‘Fiscal, financial and employment support programs helped cushion the impact of the pandemic on businesses and Saudi workers.’ (AFP)

There were some caveats from the IMF assessors. “To secure the recovery and spur stronger growth, policymakers need to carefully manage the exit from the remaining COVID-related support and continue the longer-term reform agenda under Vision 2030,” they said.

They also highlighted the need to continue support for the “social security net” to support low-income households which may be struggling from the effect of economic recession compounded by higher tax rates and the withdrawal of cost of living allowances.

“If the recovery stalls, the planned reduction in government capital spending could also be slowed while keeping the medium-term capital spending envelope unchanged,” the IMF said.

The IMF report came as an endorsement of  the Kingdom’s plans to diversify its economy and invest in non-oil sectors such as tourism and entertainment. (AFP)

Above all, it is important to maintain the momentum of economic reform. “Increasing the competitiveness of Saudi workers in the private sector is important to the success of the reform agenda. Developing a competitive and diversified private sector will be difficult unless the wage expectations of Saudi workers are in line with their productivity,” the IMF assessors concluded.

According to Saidi, the pace of continued growth depends on global oil markets and the future pattern of the virus, but the signs are as good as the IMF’s conclusions.

“Saudi Arabia’s growth prospects with continued macroeconomic stability and prudent fiscal stance will encourage increased domestic and foreign investment in addition to housing investment and consumption by households,” he said.


Twitter: @frankkanedubai

Sterling set for worst week since Sept. 2020

Updated 19 June 2021

Sterling set for worst week since Sept. 2020

LONDON: Sterling extended its fall against the US dollar on Friday, dropping below $1.39, hurt by the US Federal Reserve’s hawkish surprise and an unexpected fall in Britain’s retail sales.
The pound dropped against a strengthening dollar on Thursday after the Fed surprised markets by signaling it would raise interest rates and end emergency bond-buying sooner than expected.
On Friday, it fell further against both the dollar and the euro. It was down 0.3 percent on the day at $1.389, having touched as low as $1.38555 — its weakest since May 4. It was on track for its worst week since September 2020.
Versus the euro, it was down around 0.3 percent at 85.78 pence per euro, on track for a small weekly fall.
“GBPUSD remains bogged down below the 1.39 handle by a confluence of broad USD strength and a slight deterioration in near-term data,” said Simon Harvey, senior FX market analyst at Monex Europe.
“The limited impact of the data on sterling is largely because retail sales volumes remain above pre-pandemic levels and a shift in consumption patterns toward services after the May 17th reopening was always likely.”
For cable, market participants are weighing up the Bank of England and the Fed’s relative pace of possible monetary policy tightening. The BoE next meets on June 24.
BofA strategists said in a note to clients that it changed its view on the central bank’s tightening trajectory.
and now expects a 15 basis point rate hike in May 2022, compared to previously expecting no hikes in 2022.
“Brussels’ patience with London’s having its cake and eating it is wearing thin. Indeed, there is a risk of protocols being triggered and tariffs being threatened more seriously,” wrote ING strategists in a note to clients.
“The next few weeks could thus be a vulnerable period for Cable, where a break of 1.3890 opens up 1.3800/3810 — the last stop before an extension to the March/April lows of 1.3675.”

Bahrain’s Batelco could be first stock to be dual listed on Tadawul

Updated 18 June 2021

Bahrain’s Batelco could be first stock to be dual listed on Tadawul

  • Samba has been hired as an adviser on the deal

RIYADH: Bahrain Telecommunications Co. (Batelco) is planning to become the first company to have a dual listing of shares on Saudi Arabia’s stock exchange (Tadawul), Bloomberg reported citing people familiar with the matter.

The investment arm of Samba Financial Group has been hired as an adviser on the deal, the people said, asking not to be identified for information privacy.

No decision has been made and the company may decide against the dual listing, they said.

A spokesperson at Batelco declined to comment, while Samba Capital didn’t respond to messages seeking comment, Bloomberg said.

Tadawul has been trying to encourage Middle Eastern firms to dual list for years, without success. Aluminium Bahrain had considered a dual listing in 2014, but it never occurred.

Saudi Arabia’s National Debt Management Center wins global awards for second year

Updated 18 June 2021

Saudi Arabia’s National Debt Management Center wins global awards for second year

  • Saudi office won Middle East and emerging market awards

RIYADH: Saudi Arabia won the Best Sovereign Public Debt Office in the Middle East and the Most Impressive Emerging Market Issuer Award at the 2021 Global Capital Bond Awards, for the year 2021, for the second year in a row, SPA reported.

The Global Capital Bond Awards honors the achievements of governments and companies of all sizes in the field of sovereign and regional finance, banking services, hedge funds, and many other areas within the financial services sector.

It also highlights the most prominent innovations and achievements within the financial services sector, globally.

Saudi Arabia sold SR8.27 billion ($2.20 billion) of riyal-denominated sukuk in June, up from $941 million in May, bunt down from $3.1 billion April, National Debt Management Center data show.

“Driving growth of the Kingdom’s capital markets will be an increase in bond issuance to help fund the SR12 trillion Vision 2030," said Khalid Al-Bihlal, head of S&P Global Ratings KSA. "We project a gradual rise in the use of Saudi Arabian riyal-denominated bond issuance as the local capital markets develop. The US dollar is currently the currency of choice for such bonds."

Saudi MoF electronically linked to SAMA

Updated 18 June 2021

Saudi MoF electronically linked to SAMA

RIYADH: The Saudi Central Bank (SAMA) announced the completion of an electronic link with the Ministry of Finance to process requests relating to the bank accounts of government agencies held at Saudi commercial banks through the online portal Hesaab.

SAMA is seeking to improve and accelerate the procedures related to requests of government agencies’ bank accounts received from the Ministry of Finance, by implementing technical solutions with minimal human intervention, it said in a statement on Thursday.

The Hesaab portal is one of the National Transformation Program 2020 initiatives that improves the level of financial services, in line with Vision 2030.

Oil falls amid dollar strength; demand picture still bullish

Updated 18 June 2021

Oil falls amid dollar strength; demand picture still bullish

  • Prices remain close to multi-year highs
  • Dollar jumped since Fed moved rate-hike forecast forward

LONDON: Oil prices fell for a second straight session on Friday as the US dollar soared on the prospect of interest rate hikes in the United States, but they were on track to finish the week little changed and only slightly off multi-year highs.
Brent crude futures were down 64 cents, or 0.9 percent, at $72.44 a barrel as of 9:00 a.m. GMT, extending a 1.8 percent decline on Thursday. The contract is set to be largely steady for the week.
US West Texas Intermediate (WTI) crude futures were down 53 cents, or 0.8 percent, at $70.51 a barrel, after retreating 1.5 percent on Thursday and is also set to be flat on the week.
On Wednesday, Brent settled at its highest price since April 2019 while WTI settled at its highest since October 2018.
“Oil markets retreated sharply overnight as a stronger US dollar and falling commodity prices elsewhere saw the overbought technical correction continue,” said Jeffrey Halley, senior market analyst at OANDA.
The dollar has rocketed in the two sessions since the US Federal Reserve projected possible rate hikes in 2023, earlier than market watchers previously expected. A rising dollar makes oil more expensive in other currencies, curbing demand.
The prospect of rate hikes also weighed on the longer-term growth outlook, which would eventually hurt oil demand, in contrast to the near-term outlook for growth in demand as COVID-19 related curbs on movement and business activity ease and road and air travel pick up, said Westpac senior economist Justin Smirk.
“The near term’s all very positive. The question is how much further can it rise, how much scope is there if you’re looking at an environment where interest rates are going to rise,” Smirk said.
Oil prices also fell after Britain on Thursday reported its biggest daily rise in new cases of COVID-19 since Feb. 19, with government figures showing 11,007 new infections versus 9,055 a day earlier.
Adding to negative sentiment were remarks from Iran’s top negotiator on Thursday saying talks between Tehran and Washington on reviving the 2015 Iran nuclear deal have come closer than ever to an agreement.