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be equivalent to a SAR100bn cumulative spending cut, which we believe can be accommodated from capex retrenchment. On the basis of the above, fiscal consolidation would likely drive real GDP growth lower to an average of just around 1% of GDP. This estimate is based on a ST GCC fiscal multiplier of 0.2 for real spending to real non-oil GDP, in line with academic literature. Fx policy stays the course; NTP blurs medium-term incentives We do not believe Deputy Crown Prince Mohammed bin Salman is considering Fx reform in the near-term. We have expressed here our view that the Fx peg would hold as fiscal policy undergoes a sizeable multi-year adjustment. In a bearish scenario for oil prices, the NTP is unlikely to be implemented as deep budget cuts are likely to be required to sustain the Fx policy. We believe an oil price of at least US$50/bbI is broadly consistent with full and timely NTP implementation, but fiscal policy still needs to be disciplined. If fiscal non-oil revenue targets are missed, a higher oil price is likely to be needed. However, if the NTP is successful in diversifying the economy, it will make the costs of running an overvalued exchange rate more prohibitive, particularly as the external accounts are likely to become more responsive to an Fx shock. It also introduces a pro- growth bias for policy-makers in charge of diversifying the economy, which may conflict with the implementation of unpopular fiscal reforms or the depth of fiscal consolidation needed at weak levels of oil prices. The NTP diversification initiatives may suffer from a timing mismatch when it comes to net external receipts generated. This is because the sectors that would generate Fx receipts (non-oil exports, religious tourism) or localization policies are likely to be slow to ramp-up, while Fx demand in the economy is likely to be supported (rather than deflated) by government diversification policies. Last, the desire to build a large SWF may suggest a desire to conserve Fx reserves. Chart 21: Illustrative paths of Saudi government deposits at SAMA Chart 22: Illustrative paths of SAMA foreign assets ip of GDP 46 of GDP ——— US$50/bbI oil - nominal spending flat 10 US$50/bbI oil - nominal spending flat —— US$50/bbI oil - modest fiscal adjustment 0 il - i ——— US$50/bbI oil - ambitious fiscal adjustment —— US$25/bbl oil - modest fiscal adjustment —— US$50/bbI oil - ambitious fiscal adjustment —— US$25/bbI oil - modest fiscal adjustment oooocqcoooqoooqoc$q?’je: x bs x x x x b x x Na ao ooc@®?crennxoeddaoad & fc ££ = = NN NN Ss ococ aca aneqcercoeo a © 2 a a2 & mOnoonoendnm ooc$c*#*crieoeoooog#edeocreaoao9eoe a NNN NNN NNN NNN NNN NNN NNN NOE Rr Or OS NNNNNNN NNN NN SN Source: , Haver, BofA Merrill Lynch Global Research estimates Source: Haver, BofA Merrill Lynch Global Research estimates 26 GEMs Paper #26 | 30 June 2016 OS merrill Lynch HOUSE_OVERSIGHT_016136