Riyadh – Mubasher: Bank of America Merrill Lynch has said that it expects the political succession in Saudi Arabia to be “relatively smooth…despite the unprecedented political change.”
In a new report, the US-based bank said that following the change, priority will be given to near-term domestic politics, indicating that the next stage of economic reform plans was likely to be postponed.
Commenting on the USD-SAR peg, the bank said it expects the peg to hold “given sizeable foreign assets and the experience with implementing multi-year fiscal adjustments”.
The bank on Sunday said it expects an improvement in oil prices will “smooth the adjustment process”.
“Liquidity improvement has run its course and the non-oil sector growth rebound is likely to remain subdued,” the report showed, noting that a prolonged period of low oil prices, devaluation, fiscal reform problems, political succession, and regional geopolitical threats continue to be “primary risks” facing the Saudi government.
Saudi Arabia’s recent announcement of its quarterly fiscal data indicates that spending is “tightly controlled”, whereas the rise in revenues was due to improvement in oil prices and – possibly – “a higher transfer ratio from Saudi Aramco”, the bank stated.
It noted, however, that the larger drawdown from government deposits at the Saudi Arabia Monetary Agency (SAMA) of SAR 50 billion ($13.3 billion) in the first quarter of 2017, and representing 1.9% of gross domestic product (GDP), “suggests underreporting in the deficit.”
“We think this is due to the ongoing repayment of government arrears (SAR 30 billion). The larger drop in foreign exchange reserves than implied by the fiscal imbalance suggests that capital outflows (partly linked to foreign exchange demand following repayment of government arrears) have continued,” the report stated.
SAMA’s total reserve assets dropped by $8.4 billion in April to $500.3 billion; the decline that has been “worse than expected” after the Saudi government launched a $5.9 billion international sukuk issue in the same month.
The bank said that one of the reasons behind this sharp drop may be that sukuk proceeds are still being held in a government account and will be reflected in foreign exchange reserves when they are transferred into the domestic account, perhaps in May.
“If this benign interpretation is not correct, we think that the decline is likely due to capital outflows, potentially partially linked to off-balance sheet government spending (arrears/military spending) and a $1 billion uptick in private sector dollarisation, rather than fiscal policy per se, in our view,” the bank concluded.
