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Macro: charting the way forward Jean-Michel Saliba MLI (UK) jean-michel.saliba@baml.com The Saudi Vision 2030 and National Transformation Plan (NTP) present a comprehensive roadmap for change and augur for committed diversification efforts, in our view. Announced reforms can help sustain higher potential growth if fully realized as new sectoral sources of growth are developed. Positively, the NTP borrows elements from other successful strategic case studies. Still, we find a number of targets ambitious or unrealistic on the fiscal and diversification fronts, and the sequencing and details of the fiscal measures are left nebulous. In terms of the other pillars of the macro view, namely energy and Fx policy, the NTP presents a mixed picture, in our view. Energy policy is likely to be less aggressive, as the NTP suggests a constant oil production capacity. To remain consistent with the targeted government debt accumulation path, we estimate that oil prices have to average at least US$50/bbI in 2016-20 along with no growth in spending (excluding the additional cost of NTP initiatives). Partial implementation could require oil prices of cUS$65/bbl. Fiscal consolidation remains imperative to support the Fx peg, in line with stability and economic imperatives. However, as diversification progresses, the case for increased Fx flexibility to support competitiveness could likely gradually take shape. Policy-making growth-focused plans may conflict with needs to deflate Fx demand in the economy. Towards better governance The comprehensive economic blueprint unveiled by the Saudi Vision 2030 and the National Transformation Plan (NTP) confirms the economic reform credentials of the current administration. It is likely to improve government culture, accountability and transparency, in our view. The NTP will be implemented across 24 government bodies and has been presented through a number of press conferences with high-level ministerial presentations. The Governance Framework details steps to institutionalize and coordinate implementation through restructuring the government. It proposes a number of committees and bodies to report to the Council for Economic and Development Affairs (CEDA). It also introduces an escalation mechanism to rapidly resolve bottlenecks, which could see matters escalated to CEDA in 42 days. A wide-ranging policy-making reshuffle In line with ongoing Saudi Vision 2030 implementation efforts, a wide-ranging restructuring of the Saudi Cabinet and government bodies was announced in May to drive change in the government. King Salman issued 51 Royal Decrees restructuring the Cabinet, various government bodies and appointing a number of officials into various government roles. A statement concurrently issued by the Royal Court suggested these changes are in line with the recently announced Saudi Vision 2030 and aim to support its implementation. This follows from the January 2015 restructuring of the bodies affiliated to the Council of Ministers, which saw the creation of CEDA and the Council for Political and Security Affairs. We list a few major changes below. New Oil Minister represents technocratic experience and policy continuity The appointment of Khalid Al-Falih to the Ministry of Energy, Industry and Mineral Resources is not surprising, given that former Minister of Petroleum and Mineral Resources Al-Naimi has previously suggested he was approaching retirement due to old age. Al-Falih’s appointment continues the tradition of non-Royals heading the Ministry, while simultaneously holding the Chairmanship role of Saudi Aramco. Furthermore, according to local press, Al-Falih appears close to Deputy Crown Prince Mohamed bin Salman, and his appointment likely confirms the recently assertive Royal influence over energy policy, in our view. New Minister of Energy, Industry and Mineral Resources Al- Falih’s past official pronouncements are consistent with stable Saudi energy policy, in our view. OS Merrill Lynch GEMs Paper #26 | 30 June 2016 3 HOUSE_OVERSIGHT_016113