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Focus on increasing non-hydrocarbon fiscal revenue could fall short of target The breakdown of measures to raise non-oil revenues is not given. However, the tally is close to the USS100bn targeted in the Vision 2030 and is thus likely to include measures discussed then: hikes to administered energy prices, review of current levels of fees and fines, introduction of new fees, land tax (we estimate annual revenues of 1.5-2% of GDP in its first phase when fully implemented). In this regard, the NTP suggests forthcoming privatizations, imposition of taxes on harmful products (likely tobacco and soft drinks), introduction of a Value-Added Tax (VAT) for which we estimate annual revenues of up to 2% of GDP, implementation of a unified income tax and of an income tax on residents (although official comments later clarified there were no plans to tax nationals but stayed equivocal regarding expatriates). Although there is no direct budgetary impact, water and electricity subsidies are targeted to decrease by SAR200bn. Non-oil subsidies are targeted to decrease by 20% by 2020. The latter, we believe, consists largely of subsidies for social and sports clubs, private education, private hospitals, and other agricultural subsidies. They were budgeted at SAR3.9bn (US$1.0bn; 0.2% of GDP) in 2016, down from SAR15.0bn (US$4.0bn; 0.6% of GDP) in 2015. A 20% cut to these on-budget non-oil subsidies would thus generate minimal savings of US$O.2-USS$0.8bn (0.1-0.5% of GDP) depending if the reference base year was 2015 or 2016. According to the Deputy Crown Prince pronouncements early in the year, medium-term plans are also likely to target the introduction of US$400bn of unutilized state assets (land, etc) to state-owned funds, with the latter in turn in charge of developing them into projects and companies than can be IPOed to the public. In our view, this may be linked to the Ministry of Finance assigned KPI of increasing total recorded non-oil assets (real estate, etc) from SAR3trn to SARStrn. The Deputy Crown Prince provided a breakdown of the government target of raising US$100bn in additional non-oil revenue annually by 2020. The bulk of this increase in non-oil revenue would come from the restructuring of subsidies which could generate USS30bn per year (4.9% of GDP), according to the Deputy Crown Prince. VAT implementation, a Green Card-like program and a plan to allow corporates to hire foreign workers in excess of their official quotas could bring in US$10bn (1.6% of GDP) a year by 2020, according to the Deputy Crown Prince. Chart 14: US$100bn in additional non-oil revenue targeted by 2020 Chart 15: Government to focus on raising non-hydrocarbon revenue SARbn le Non-oil revenue 1,500 me Oi] revenue 100 BS$10bn ——= Oil revenue (% of total, rhs) 1 Be ok US$40bn \ Ff : 1,000 80 US$30bn 70 500 1 m Other measures . | = Subsidy reform - 60 m Fees to excees foreign worker quotas TTT ™ Green Card-like program : Or MOM OT DMOKN DT VMONDMTMONDT OW a m Value-Added Tax KSBHSHRHSSHOHHDOBSOSSSSSOO SSS SS SS HPS SSS SS SSE NAIAAAA AN Source: Bloomberg Source: Haver, BofA Merrill Lynch Global Research OO erartll Lynch GEMs Paper #26 | 30 June 2016 +19 HOUSE_OVERSIGHT_016129