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Rationalization of subsidies for water and electricity The sweeping energy, water and electricity administered price changes introduced in December 2015 are a first step in the five-year fiscal consolidation and economic transformation strategy. We expect further reviews of energy, water, and electricity prices over the medium-term. Furthermore, the likely government review of current levels of fees and fines, introduction of new fees, application of a VAT and introduction of excise taxes on tobacco and soft drinks will also impact the Saudi consumer. Subsidy cuts on energy and utilities to add up to 1.5ppt to CPI inflation only We estimate the December natural gas price hike on petrochemical firms, domestic crude oil price hike as well as the combined gasoline and diesel price hike introduced could add USS2.2bn, US$2.0bn and US$3.8bn to central government revenues if fully passed to the budget (a combined 1.2% of GDP). We estimate the direct impact of these higher gasoline, water and electricity prices to add 1.3-1.5ppt to CPI inflation due to their low basket weights (c.1.5%, cO.4% and 1.6% respectively). We think a 5% VAT tax could add c2% of 2015 GDP in fiscal revenues over the medium-term. Chart 58: Consumer Price Index (CPI) basket- consumer expenditure breakdown m Food and non-alcoholic beverages 0.47%, Tobacco 2.69% ™ Clothing and footwear 3.50% & 21.70% ; _ . = Housing, water, electricity, gas, and other fuels m Furnishings, household equipment & routine household maintenance Health @ Transport 10.44% Communication m@ Recreation and culture Education = Restaurants and hotels Source: Haver, BofA Merrill Lynch Global Research Subsidies account for 15% of Almarai’s net income; 40% are related to poultry Almarai continues to receive subsidies from the Saudi government, amounting to SAR295mn in 2015. This represents 15% of the Almarai’s 2015 net income. The government pays subsidies based on price of subsidized feed importer, which means it may increase or decrease naturally. Regarding the breakdown by business (poultry, dairy), it is unfixed, depending on the price of feed and ingredients. As of 2015, subsidies for poultry accounted for 40% and dairy for 60%. 60 GEMs Paper #26 | 30 June 2016 38 Merrill Lynch HOUSE_OVERSIGHT_016170