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Chart 23: Illustrative paths of Saudi fiscal balance Chart 24: Illustrative paths of Saudi government debt % of GDP % of GDP 30 100 a 75 10 50 0 10 25 -20 0 S N a oO co S N = a oO foe) Oo N st oO [oe] Oo N a ico} c So N t+ [<o} [oe] oO N st Oo foe) Oo a> a fo?) fo?) [o>] =] So o Oo oS — —_ — —_ — N D fo} a> a oS oS oO So fa) = = = = = N for] for] fo?) for) fo?) So oO oO oO oO oO oO oO oO Oo Oo fo?) a a a Oo oO oO oOo oOo Oo oOo oO oO oOo oO — — Sal — mal N N N N N N N N N N N — — — — N N N N N N N N N N N —— US$50/bbI oil - nominal spending flat —— US$50/bbI oil - nominal spending flat —— US$50/bbI oil - modest fiscal adjustment ——— US$50/bbI oil - modest fiscal adjustment —— US$50/bbl oil - ambitious fiscal adjustment ——— US$50/bbI oil - ambitious fiscal adjustment —— US$25/bbI oil - modest fiscal adjustment —— US$25/bbl oil - modest fiscal adjustment US$25/bbI oil - ambitious fiscal adjustment US$25/bbI oil - ambitious fiscal adjustment Source: Haver, BofA Merrill Lynch Global Research estimates Source: Haver, BofA Merrill Lynch Global Research estimates Consumer to face mixed trends Labour policies are likely to remain a major focus for the Saudi government. Low oil prices have dented the government’s direct ability to support the consumer compared to the boom years. Furthermore, negative to flat public sector wage growth is likely to dampen income and consumption trends, although Specialized Credit Institutions (SCls) could alleviate tightening banking sector household lending standards. The NPT suggests a focus on boosting female employment as well as increasing the cost of foreign labor relative to national labor. The latter implies a negative impact on corporate margins and profits, in the event higher labor costs are not reflected in higher consumer prices and inflation). The negative near-term cost and efficiency implications of continued labour market reforms are mitigated by the fact that eventual increase in private sector employment of higher-paid Saudi labour should prove supportive for consumption trends once the dust settles. The NTP targets increasing the cost of employment of Saudis compared to expatriates from 400 to 280. We calculate that the ratio of private sector wages of Saudis compared to non-Saudis stood at 3.64 and 1.29 for males and females respectively in 2015. The NTP target is thus akin to increasing non-Saudi private sector wages by 43% over the period to 2020, a CAGR increase of 7.4%. This would squeeze corporate profits, lead to inflationary pressures in the economy, and lead to annual additional Fx outflows through remittances of US$2.8bn (0.4% of GDP). As such, it is more likely that the employment cost of non-Saudis is likely to be increased through measures such as fees for government services, taxes and levies. It is unclear that the NTP target can be met solely through this route, but it would avoid additional Fx outflows despite still having a negative impact on corporate margins and inflation, in our view. The Nitaqat Saudization program is likely to be extended in the near-future through the forthcoming launch of the “balanced Nitaqat” initiative. While employment quotas are likely to be tightened, they will also take into account wage levels, job quality and women employment ratios, according to local press. A likely target is likely to be increased job creation for Saudis in the retail sector through higher quotas, in our view. OS Merrill Lynch GEMs Paper #26 | 30 June 2016 27 HOUSE_OVERSIGHT_016137