Anti-corruption drive could lead to higher growth potential: BofAML

Saudi Arabia’s recent anti-corruption drive — under which at least 159 people remain detained — coupled with higher oil prices could lead to higher medium-term growth potential for the country, Bank of America Merrill Lynch (BofAML) said in its recent market outlook report.

Economic growth, too, could find a bottom this year, Jean-Michel Saliba, BofAML’s MENA economist, said in the report.

“The anti-corruption drive could improve accountability and governance, especially if transparency improves,” Saliba said. “However, the potential impact of the probe on the broader backdrop, investment and capital outflows bears watching.”

The probe likely supports Saudi Arabia’s reform efforts and provides grounds for continuing to gear energy policy towards supporting oil prices, he added.

According to BofAML, the possible return of the embezzled funds to the state treasury is unlikely to provide much support to Saudi Arabian Monetary Authority’s (SAMA) FX reserves.

“A maximum of $100 billion in offshore funds was held by the private sector at year-end 2015,” Saliba said.

“We would expect only a small fraction of that to be at risk (which would require proof of links to corrupt practices) within this probe, and expect assets frozen to include material domestic holdings,” he added.

With the focus shifting to growth, the Saudi government seems set to continue focusing on supporting the economy through initiatives such as: a gradual phasing of fiscal reforms; introduction of household allowance and private sector support programs; bring in structural reforms such as women driving; and launch of infrastructure projects led by the Public Investment Fund (PIF), the report said.

“Medium-term growth potential could increase by 2 percentage points on the back of structural reforms,” Saliba said.

The bank also noted that oil prices remain determinant of the success of the reform program. If oil is at $40 per barrel (bbl), then the announced fiscal reforms are insufficient to safeguard macroeconomic stability, the report said.

“The $40-50/bbl range for oil prices is a grey zone. We draw more comfort in the success of fiscal reforms at $60/bbl, assuming no changes in the program,” Saliba said.

About the 2018 budget, BofAML said that with oil at $60/bbl, authorities could either chose to save 3 percent of GDP in windfall, or spend it and boost non-oil real GDP by 0.5 percentage point.

Further spending could raise the fiscal breakeven oil price, exposing the budget to oil price volatility, the report said.

On the other hand, higher oil prices could reduce external financing requirements. “We estimate every $10/bbl increase in oil prices translates to $5 billion to $7.5 billion in lower annual external borrowing requirements,” the report said.

The extension of the fiscal balance target program to 2023 would help negate the effect partly as international bond redemptions kick in over 2020-2023, it added.