Smooth Saudi succession to bring focus back on reform, says BofAML

Saudi Arabia is expected to see a relatively smooth political succession despite the unprecedented political change, Bank of America Merrill Lynch (BofAML ) said in its GEM’s macro monthly report.

With the Kingdom giving priority to domestic politics in the near term, the next phase of economic reforms would be delayed.

A marginal fiscal impact is likely in case the implementation of the Household Allowance program is delayed simultaneously with the second round of energy price hikes.

The US-based bank added that while the retroactive reversal of the public sector bonuses and allowances only adds 0.25 percent of gross domestic product (GDP) to spending, it reduces policy-making room to maneuver in response to low oil prices.

The reforms embedded in the Fiscal Balance 2020 Program are likely to fundamentally transform the economy's structure and growth.

“We think the reform effort is enough to support the USD peg but more will be needed if we are stuck in an environment of US$40/bbl,” the report added.

BofA added that larger drawdowns from government deposits at the Saudi central bank in Q1 implies underreporting in the deficit, due to the ongoing repayment of government arrears and larger decline in FX reserves.

The Saudi central bank reported a $8.4 billion drop in total reserve assets in April to $500.3 billion despite an international sukuk issue worth $5.9 billion, as sukuk proceeds are still being held in a government account and will only reflect in FX reserves when they are transferred into the domestic account, perhaps in May.

“If this benign interpretation is not correct, we think that the decline is likely due to capital outflows, potentially partially linked to off-balance sheet government spending (arrears/military spending) and a US$1bn uptick in private sector dollarization, rather than fiscal policy per se, in our view,” BofA added.