HOUSE_OVERSIGHT_016138.jpg

Table 12: Selected drivers of Saudi consumer

Direction
Comment
Oil prices
Volatile
Indirect impact through economic activity and confidence
Population growth
Decreasing
Direct impact through lower number of expatriates and national birth rate
Public sector wage growth
Flat to contracting
Freeze in government wage bill
Private sector wage growth
Flat to minor increase
Some sectors to contract (construction), others resilient (retail, staples)
Saudi private sector male employment
Mixed
Saudization helps, but economic slowdown and supply-side factors impact negatively
Saudi private sector female employment
Increasing
NTP aims to increase it through several measures
Consumer leverage
Decreasing
Banking sector liquidity and lending standards are tightening
Real estate finance
Increasing
NTP measures are supportive in this area
Specialized Credit Institutions (SCIs)
Flat
SCIs can continue to support the economy
Saudization
Increasing
Negative impact short-term, positive impact medium-term
Subsidies
Decreasing
Timing and breadth unclear as of yet
Other fiscal consolidation measures (VAT, etc)
Likely forthcoming
Direct and indirect negative impact on consumer
Source: BofA Merrill Lynch Global Research

Chart 25: Private sector average monthly wages are increasing
SAR/month
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Male
Female
Total
2004 2005 2006 2007 2008 2009
2010 2011 2012 2013 2014 2015
Source: SAMA, BofA ML Global Research. SAMA wage data coverage appears incomplete.

Chart 26: Wedge between Saudi and non-Saudi private sector salaries
SAR/month
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Male
Female
Male
Female
Saudis
Non-Saudis
2014 2015
Source: General Organization for Social Insurance (GOSI), BofA ML Global Research.

Banks and contractors will require supportive policies to realize NTP benefits
The banking sector is targeted to benefit from the NTP initiatives through greater disintermediation (SMEs, real estate financing, non-oil export financing) and greater household savings. However, domestic liquidity is likely to remain structurally tight, in our view. The NTP targeted increase in non-oil fiscal revenue is likely to tighten domestic liquidity, all else being equal, as it would have the effect of extracting resources from the non-hydrocarbon private sector (as opposed to government domestic spending that injects liquidity).

Linked to liquidity trends and banking sector asset quality, the issue of government arrears to contractors is likely to take centre stage, in our view. Resolving this is likely to be required if the capex projects under the NTP are to be executed on a timely fashion, in our view. We think the government’s proposal to issue "I Owe You' notes (IOUs) could be a step in this direction.

Government looks to issue IOUs
According to the press, the Saudi government has paid contractors some cash on its arrears, and is considering to issue "I Owe You' notes (IOUs) to them. Contractors would receive these notes to cover their outstanding dues, which they could hold until maturity or sell on to banks. The government has been highlighting it wanted to settle the contractor sector dues, and recently a high-profile domestic contractor has made mass redundancies. In the previous downturn in the 1980s, arrears to domestic contractors were also likely to have been accumulated. We highlighted that the fiscal deficit was likely under-reported last year. Also, construction was one of the fastest growing sector last year both in terms of domestic activity and of domestic credit.

28 GEMs Paper #26 | 30 June 2016
Merrill Lynch
HOUSE_OVERSIGHT_016138