Saudi bank­ing sys­tem well po­si­tioned to weather growth slow­down: IMF

The Pak Banker - - COMPANIES/BOSS -

The Ex­ec­u­tive Board of the In­ter­na­tional Mon­e­tary Fund (IMF) to­day con­cluded the Ar­ti­cle IV Con­sul­ta­tion with Saudi Ara­bia.

The IMF says Saudi Ara­bia has been one of the strong­est grow­ing economies in the G-20. Ris­ing oil prices and pro­duc­tion re­sulted in large ex­ter­nal and fis­cal sur­pluses and strong gov­ern­ment spend­ing led to ro­bust pri­vate sec­tor ac­tiv­ity. Over the past year, how­ever, the global oil mar­ket en­vi­ron­ment has changed sub­stan­tially with oil prices drop­ping by close to 50 per­cent.

Real GDP growth is pro­jected to slow to 2.8 per­cent this year, and then fur­ther to 2.4 per­cent in 2016 as gov­ern­ment spend­ing be­gins to ad­just to the lower oil price en­vi­ron­ment. Over the medium-term, growth is ex­pected to be around 3 per­cent. In­fla­tion is likely to re­main sub­dued.

The de­cline in oil prices is re­sult­ing in sub­stan­tially lower ex­port and fis­cal rev­enues. A cen­tral gov­ern­ment fis­cal deficit of 19.5 per­cent of GDP is pro­jected in 2015, and while the deficit will de­cline in 2016 and be­yond as one-off spend­ing ends and large in­vest­ment projects are com­pleted, it will re­main high over the medium-term.

Nev­er­the­less, gov­ern­ment debt is very low and was 1.6 per­cent of GDP at end2014. The cur­rent ac­count sur­plus de­clined to 10.9 per­cent of GDP in 2014. It is ex­pected to move into a small deficit in 2015 but re­turn to sur­plus dur­ing 2016-20.

De­posit in­flows to banks and pri­vate credit growth have slowed in re­cent months. Nonethe­less, the bank­ing sys­tem is well po­si­tioned to weather lower oil prices and the growth slow­down. The de­cline in oil prices has in­creased the im­por­tance of struc­tural re­forms to switch the fo­cus of growth away from the public sec­tor and to­ward the pri­vate sec­tor. With un­em­ploy- ment of na­tion­als still high and the work­ing-age pop­u­la­tion grow­ing strongly, the gov­ern­ment is con­tin­u­ing to fo­cus on re­forms that aim to in­crease the em­ploy­ment of na­tion­als in the pri­vate sec­tor and di­ver­sify the econ­omy away from its re­liance on oil.

IMF Ex­ec­u­tive Di­rec­tors wel­comed Saudi Ara­bia's strong eco­nomic per­for­mance while not­ing that the large de­cline in oil prices is likely to dampen growth in the pe­riod ahead. Di­rec­tors con­sid­ered that un­cer­tain­ties about fu­ture oil prices and pos­si­ble es­ca­la­tions of re­gional ten­sions are the main risks to the out­look. They com­mended Saudi Ara­bia's com­mit­ment to pro­mot­ing sta­bil­ity in the global oil mar­ket and to pro­vid­ing fi­nan­cial sup­port for de­vel­op­ing coun­tries in the re­gion.

Di­rec­tors noted that the sharp drop in oil rev­enues and con­tin­ued ex­pen­di­ture growth would re­sult in a very large fis­cal deficit this year and over the medium term, erod­ing the fis­cal buf­fers built up over the past decade.

Against this back­ground, they un­der­scored the need for a grad­ual, but siz­able multi?year fis­cal ad­just­ment based on a mix of ex­pen­di­ture and rev­enue mea­sures. These mea­sures should in­clude com­pre­hen­sive energy price re­forms, firm con­trol of the public sec­tor wage bill, greater ef­fi­ciency in public sec­tor in­vest­ment, and an ex­pan­sion of non?oil rev­enues, in­clud­ing by in­tro­duc­ing a VAT and a land tax. Di­rec­tors agreed that is­su­ing debt to fi­nance part of the deficit is ap­pro­pri­ate and would help pro­mote the de­vel­op­ment of pri­vate cap­i­tal mar­kets.

Di­rec­tors con­curred that a stronger fis­cal frame­work would sup­port fis­cal con­sol­i­da­tion. The an­nual bud­get should be set within a medium?term fis­cal frame­work that clearly es­tab­lishes the author­i­ties' pol­icy in­ten­tions, fully in­te­grates the ex­pendi- ture pri­or­i­ties from the na­tional de­vel­op­ment plan, and delinks ex­pen­di­tures from short?term volatil­ity in oil rev­enues while en­sur­ing that spend­ing ad­justs to longer?term price trends. Di­rec­tors wel­comed the author­i­ties' plan to es­tab­lish a macro fis­cal unit and pub­lish fis­cal data in GFSM2001 for­mat.

Di­rec­tors agreed that the bank­ing sys­tem is in a strong po­si­tion to weather lower oil prices and weaker growth and sup­ported con­tin­u­ing ef­forts to strengthen fi­nan­cial sec­tor reg­u­la­tion and su­per­vi­sion. They saw merit in for­mal­iz­ing the macro­pru­den­tial pol­icy frame­work to en­sure co­or­di­na­tion among key agen­cies and to build on the ex­ist­ing use of macro­pru­den­tial tools in a coun­ter­cycli­cal man­ner.

Di­rec­tors agreed that the ex­change rate peg to the U.S. dol­lar re­mains ap­pro­pri­ate. They em­pha­sized the need for fis­cal con­sol­i­da­tion to sup­port the peg over the long term and saw merit in pe­ri­od­i­cally re­view­ing the peg in co­or­di­na­tion with other GCC coun­tries to as­sess the im­pact of la­bor mar­ket and other struc­tural re­forms.

Di­rec­tors sup­ported on­go­ing poli­cies to in­crease the em­ploy­ment of na­tion­als in the pri­vate sec­tor and di­ver­sify the econ­omy. They wel­comed ef­forts to strengthen the busi­ness en­vi­ron­ment, de­velop in­fra­struc­ture, in­vest in ed­u­ca­tion and train­ing, and in­crease em­ploy­ment op­por­tu­ni­ties for women.

Di­rec­tors em­pha­sized, how­ever, that achiev­ing the author­i­ties' goals will re­quire re­align­ing the in­cen­tives fac­ing firms and work­ers to en­cour­age trad­able rather than non trad­able pro­duc­tion and em­ploy­ment in the pri­vate rather than public sec­tor. Di­rec­tors noted the con­tin­ued progress that Saudi Ara­bia is mak­ing in im­prov­ing the qual­ity and avail­abil­ity of key eco­nomic sta­tis­tics and wel­comed the author­i­ties' plan to sub­scribe to SDDS in 2016.

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