HOUSE_OVERSIGHT_016138.jpg

Table 12: Selected drivers of Saudi consumer Direction Comment Oil prices Volatile Indirect impact through economic activity and confidence Population growth Decreasing Direct impact through lower number of expatriates and national birth rate Public sector wage growth Flat to contracting Freeze in government wage bill Private sector wage growth Saudi private sector male employment Flat to minor increase Mixed Some sectors to contract (construction), others resilient (retail, staples) Saudization helps, but economic slowdown and supply-side factors impact negatively Saudi private sector female employment Increasing NTP aims to increase it through several measures Consumer leverage Decreasing Banking sector liquidity and lending standards are tightening Real estate finance Increasing NTP measures are supportive in this area Specialized Credit Institutions (SCls) Flat SCls can continue to support the economy Saudization Increasing Negative impact short-term, positive impact medium-term Subsidies Decreasing Timing and breadth unclear as of yet Other fiscal consolidation measures (VAT, etc) Likely forthcoming Direct and indirect negative impact on consumer Source: BofA Merrill Lynch Global Research Chart 25: Private sector average monthly wages are increasing Chart 26: Wedge between Saudi and non-Saudi private sector salaries SARImonth 2004 m 2005 m 2006 m 2007 m 2008 m2009 SAR/month 3,500 - 2010 m 2011 = 2012 m2013 m2014 = 2015 7,000 m2014 2015 3,000 6,000 5,000 2,000 - | 3,000 1,500 - 2,000 500 - 0 0 Female Female Male Female Total Saudis Non-Saudis Source: SAMA, BofA ML Global Research. SAMA wage data coverage appears incomplete. Source: General Organization for Social Insurance (GOSI), BofA ML Global Research. Banks and contractors will require supportive policies to realize NTP benefits The banking sector is targeted to benefit from the NTP initiatives through greater disintermediation (SMEs, real estate financing, non-oil export financing) and greater household savings. However, domestic liquidity is likely to remain structurally tight, in our view. The NTP targeted increase in non-oil fiscal revenue is likely to tighten domestic liquidity, all else being equal, as it would have the effect of extracting resources from the non-hydrocarbon private sector (as opposed to government domestic spending that injects liquidity). Linked to liquidity trends and banking sector asset quality, the issue of government arrears to contractors is likely to take centre stage, in our view. Resolving this is likely to be required if the capex projects under the NTP are to be executed on a timely fashion, in our view. We think the government’s proposal to issue "| Owe You' notes (IOUs) could be a step in this direction. Government looks to issue |OUs According to the press, the Saudi government has paid contractors some cash on its arrears, and is considering to issue "| Owe You' notes (IOUs) to them. Contractors would receive these notes to cover their outstanding dues, which they could hold until maturity or sell on to banks. The government has been highlighting it wanted to settle the contractor sector dues, and recently a high-profile domestic contractor has made mass redundancies. In the previous downturn in the 1980s, arrears to domestic contractors were also likely to have been accumulated. We highlighted that the fiscal deficit was likely under-reported last year. Also, construction was one of the fastest growing sector last year both in terms of domestic activity and of domestic credit. 28 GEMs Paper #26 | 30 June 2016 38 Merrill Lynch HOUSE_OVERSIGHT_016138