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Table 11: Public Investment Fund listed domestic assets and their monetization potential in regards to replenishing fiscal reserves at SAMA Potential value of Potential value of secondary offering ifa secondary offering if government stake is sold, § government’s but with the government _ existing minority still retaining 51% control stake is liquidated Entity Sector Current government stake (%) Free-float (%) (US$bn) (US$bn) Saudi Basic Industries Corporation (SABIC) Chemicals PIF: 70.0%; GOSI: 5.7% 24.3% 12.3 0.0 Saudi Telecom (STC) Telecom PIF: 70.0%; GOSI: 7.0%; PPA: 6.77% 16.2% 6.5 0.0 Saudi Electricity (SEC) Power Government: 74.3%; Aramco: 6.9% 18.8% 54 0.0 Saudi Ground Services Travel Saudi Arabian Airline: 52.5%; National Aviation: 14.7% 30.0% 0.4 0.0 Saudi Real Estate Company Realestate PIF: 64.57% 35.5% 0.1 0.0 National Commercial Bank (NCB) Banks PIF: 44.3%; GOSI: 10%; PPA: 10.04% 35.7% 0.0 9.5 Maaden Mining PIF: 49.99%; GOSI: 7.98%; PPA: 7.45% 34.6% 0.0 5.9 Samba Banks PIF: 22.91%; GOSI: 11.76%; PPA: 15.04% 73.2% 0.0 24 Yanbu National Petrochemical Co (Yansab) Chemicals SABIC: 51%; GOSI: 11.92% 37.1% 0.0 2.2 Saudi Arabian Fertilizer Company (SAFCO) Chemicals SABIC: 42.99%; GOSI: 12.2% 44.8% 0.0 2.0 Riyadh Bank Banks PIF: 21.75%; GOSI: 16.72%; PPA: 9.18% 46.6% 0.0 1.9 Southern Province Cement Cement PIF: 37.43%; GOSI: 15.82% 46.8% 0.0 11 National shipping company Transport — PIF: 22.55% 80.0% 0.0 0.9 Saudi Catering Transport General Airline Services KSA: 35.7% 39.8% 0.0 0.8 Kayan Chemicals SABIC: 35% 65.0% 0.0 0.6 Alinma Bank Banks PIF: 10%; GOSI: 5.10%; PPA: 10.71% 74.1% 0.0 0.5 Qassim cement Cement PIF: 23.35%; GOSI: 15.09%; PPA: 5.67% 79.2% 0.0 0.4 Yanbu cement Cement PIF: 10%; GOSI: 12.37% 68.5% 0.0 0.2 National Agriculture Development Agriculture PIF: 20% 85.1% 0.0 0.1 Saudi Fisheries Agriculture PIF: 39.99% 38.5% 0.0 0.1 Saudi Public Transport Transport — PIF: 15.72% 100.0% 0.0 0.1 Eastern Province Cement Cement PIF: 10%; GOSI: 10.65% 89.4% 0.0 0.1 National Gas and Industrialization Chemicals PIF: 10.91% 88.0% 0.0 0.1 Saudi Ceramic Consumer PIF: 5.94%; GOSI: 16.19% 83.8% 0.0 0.0 Petro Rabigh Chemicals Aramco: 37.5%; Sumitomo: 37.5% 25.0% 0.0 0.0 Total 24.3 28.6 Source: Bloomberg, Bank of America Merrill Lynch Global Research. PIF = Public Investment Fund. GOSI = General Organization for Social Insurance. PPA = Public Pension Agency. Based on stock prices as of 28 June 2016. Material fiscal consolidation would be necessary to narrow macro imbalances There is no substitute for fiscal consolidation to maintain Fx policy unchanged. We map out below paths for several macro variables depending on fiscal policy and oil prices, with higher oil prices easing the adjustment requirement. In a worst case scenario where US$25/bbl oil prices would persist for the next five years, sustainability of the Saudi Fx policy rests on material fiscal consolidation, which we believe is achievable based on the mix of revenue-raising and spending restraint plans likely or announced to date. This would require a total 5-year cumulative adjustment of SAR500bn (US$133bn; 20% of 2015 GDP or 4ppt of GDP annually) from 2016 onwards, which is close to what the NTP appears to be targeting in non-oil revenue measures (US$100bn, excluding NTP costs). We think 75% of the adjustment can take place through revenue-raising measures. The remainder of the adjustment would need to take place through capex cuts and is similar in size to the capex retrenchment of the 1980-90s. However, note that if one assumes that the 2015 budget deficit will be revised higher to 18.9% of GDP, this adds a need for a further 4ppt of GDP cumulative fiscal adjustment to maintain the same trajectory of Fx reserves. An overhaul of fiscal policy will likely be required In line with the 2016 budget announcement, we would expect tight budgets to be passed. We expect a VAT with 5% yield to be implemented in 2018, alongside further administered price adjustments for energy, water and electricity. Implementation of the land tax is likely, but it is unclear whether the proceeds will be ring-fenced to be used solely for housing projects. Using solely the recurring existing proceeds of the December administered price adjustments and a VAT introduction, we still see a need for further fiscal restraint in the order of 1ppt of non-oil GDP annually. The latter would OS Merrill Lynch GEMs Paper #26 | 30 June 2016 25 HOUSE_OVERSIGHT_016135