Brighter Saudi economic outlook boosted by reforms, says IMF

A number of big infrastructure projects such as Jeddah’s new $7.2 billion King Abdulaziz International Airport are expected to bolster economic expansion. (Instagram)
Updated 23 May 2018
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Brighter Saudi economic outlook boosted by reforms, says IMF

  • An IMF team reported that growth was expected to pick up this year and over the medium-term “as reforms take hold.” 
  • Saudi Finance Minister Mohammed bin Abdullah Al-Jadaan: The statement “confirms the progress made by the Kingdom’s government in implementing economic and structural reforms.”

LONDON: Saudi Arabia’s “ambitious” reform program is set to accelerate the Kingdom’s economic growth this year, according to the International Monetary Fund (IMF).
Following discussions with Saudi officials, an IMF team led by Tim Callen reported that growth was expected to pick up this year and over the medium-term “as reforms take hold.” 

It added: “The primary challenges for the government are to sustain the implementation of reforms, achieve the fiscal targets it has set, and resist the temptation to re-expand government spending in line with higher oil prices.”

The report said considerable progress was being made to improve the business climate. Recent efforts had focused on the legal system and business licensing and regulation. The public procurement law that is being updated had a key role to play in strengthening anti-corruption policies, said the IMF.
Saudi Finance Minister Mohammed bin Abdullah Al-Jadaan said that the statement “confirms the progress made by the Kingdom’s government in implementing economic and structural reforms.”
Jean Michel Saliba, Middle East economist at Bank of America Merrill Lynch, expressed some concern that higher oil prices could encourage the government to take its foot off the fiscal prudence accelerator.

 

He said: “The IMF report is in line with our views that, while oil prices allow the Saudi government to support a pick-up in economic activity while minimizing the impact on fiscal balances, the key risk that higher oil prices bring is that medium-term (spending targets) are not adhered to.”
However, the IMF identified several encouraging KSA initiatives. The introduction of value-added tax was said to be a “milestone achievement” in strengthening the tax culture and tax administration of the country. Energy price reforms and the introduction of citizens’ accounts to compensate the less well-off for higher energy/VAT costs were also welcomed.
The IMF said that the Kingdom’s privatization and public and private partnership program, recently approved, should be accelerated.
It said: “A balance is needed between pursuing financial development and inclusion and financial stability. Increased finance for smaller businesses, more developed debt markets and improved financial access especially for women as envisaged under the Financial Sector Development Program will support growth and equality.”
Targeting a balanced budget in 2023 was lauded as being “appropriate,” and the Saudi government was advised to focus on delivering on this objective. “Limiting the growth of government spending would be necessary to achieve fiscal targets,” said the IMF.
Reforms to strengthen the budget process and the fiscal framework, increase fiscal transparency, and develop macro-fiscal analysis were said to be making good progress.
But broadening the coverage of fiscal data beyond the central government would ensure a more complete assessment of the government’s impact on the economy.
“While the public sector can be a catalyst for the development of some new sectors, it is important that it does not crowd out private sector involvement, nor remain a long-term player in markets where private enterprises can thrive on their own,” the IMF said.

More needs to be done to ensure that an accurate and timely assessment of economic developments is possible.

IMF

The IMF recommended that government policies should focus on sending clear signals about the limited prospects for public employment, easing restrictions on expatriate worker mobility, further strengthening education/training, and continuing to support increased female participation. While progress had been made in increasing data availability, “more needs to be done to ensure that an accurate and timely assessment of economic developments is possible.” 

Earlier this month, the ministry of finance published first quarter fiscal indicators that showed the Kingdom — which is making concerted efforts to diversify its oil-reliant economy — has projected a deficit of SR195 billion ($52 billion), or 7.3 percent of gross domestic product (GDP), this year, down from SR230 billion last year. It plans to balance the budget by 2023.
First-quarter revenues reached SR166.3 billion, up 15 percent from the same period last year, the ministry said in a statement.
Non-oil revenues jumped 63 percent to SR52.3 billion, partly due to a 5 percent value-added tax (VAT) that the government introduced in January.
Oil revenues rose 2 percent but the low figure was a result of a change in the way dividends are distributed and a stronger number is expected in the second quarter.
The IMF expects Saudi economic growth to hit 1.7 percent in 2018 after falling into negative territory last year.
A number of big-ticket infrastructure projects such as Jeddah’s new $7.2 billion King Abdulaziz International Airport are expected to bolster economic expansion.
In global energy markets, with crude trading at close to $80 per barrel, leading investment banks have forecast prices could go higher.
Supplies are being squeezed by the collapse of production from OPEC member Venezuela as well as worries about Iranian supplies following President Donald Trump’s decision to reimpose sanctions on Iran.

FASTFACTS

The IMF expects Saudi economic growth to hit 1.7 percent in 2018 after falling into negative territory last year.


Russian oil industry now self-reliant enough to weather US ‘bill from hell’

Updated 18 August 2018
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Russian oil industry now self-reliant enough to weather US ‘bill from hell’

  • Western sanctions imposed in 2014 over Russia’s annexation of Crimea have already made it extremely hard for many state oil firms such as Rosneft to borrow abroad
  • Russian gas exporting monopoly Gazprom has maintained its output since 2014 and actually increased exports to Europe to an all-time high in 2017

MOSCOW: Stiff new US sanctions against Russia would only have a limited impact on its oil industry because it has drastically reduced its reliance on Western funding and foreign partnerships and is lessening its dependence on imported technology.
Western sanctions imposed in 2014 over Russia’s annexation of Crimea have already made it extremely hard for many state oil firms such as Rosneft to borrow abroad or use Western technology to develop shale, offshore and Arctic deposits.
While those measures have slowed down a number of challenging oil projects, they have done little to halt the Russian industry’s growth with production near a record high of 11.2 million barrels per day in July — and set to climb further.
Since 2014, the Russian oil industry has effectively halted borrowing from Western institutions, instead relying on its own cash flow and lending from state-owned banks while developing technology to replace services once supplied by Western firms.
Analysts say this is partly why Russian oil stocks have been relatively unscathed since US senators introduced legislation to impose new sanctions on Russia over its interference in US elections and its activities in Syria and Ukraine.
The measures introduced on Aug. 2, dubbed by the senators as the “bill from hell,” include potential curbs on the operations of state-owned Russian banks, restrictions on holding Russian sovereign debt as well as measures against Western involvement in Russian oil and gas projects.
While the rouble has fallen more than 10 percent and Russian banking stocks have slumped 20 percent since the legislation was introduced, shares in Russian oil firms have climbed 2 percent, leaving them 27 percent higher so far in 2018.
“The main driver of the Russian oil industry’s profitability is the oil price denominated in roubles and it is currently posting new records as the rouble is getting weaker. Hence the sanction noise often even has a positive impact on Russian oil stocks,” said Dmitry Marinchenko at Fitch Ratings.

 

The prospects for the latest US sanctions bill are not immediately clear. It would have to pass both the Senate and House of Representatives and then be signed into law by President Donald Trump.
To be sure, Washington could really hurt the Russian oil industry if it introduced Iran-like measures forbidding oil purchases from the country. But given Russia produces more than 11 percent of global crude, such a measure would lead to a major spike in oil prices and hit the US itself hard as it is the world’s largest oil consumer.
Russian gas exporting monopoly Gazprom, for example, has maintained its output since 2014 and actually increased exports to Europe to an all-time high in 2017, securing a 34 percent share of EU markets amid rising demand.
But of all Russian oil and gas companies, it is the only one to have borrowed significant sums from the West — about $5 billion in 2017 and $3 billion in 2018 so far — using Eurobonds and syndicated loans.
What’s more, those amounts are only equivalent to a small proportion of Gazprom’s annual capital spending of $22 billion. The rest of the Russian oil industry invests a similar amount each year as well, mostly without Western funding.
That represents a major departure from the years prior to the sanctions when the lion’s share of Russian oil industry’s borrowing came from Western banks or export-backed facilities with trading houses and major oil companies.
In 2013, for example, a year before the first Western sanctions, Rosneft alone borrowed more than $35 billion from Western institutions to buy smaller rival TNK-BP and to fund its capital spending.
There has been a similar shift in joint ventures between Russian and Western companies.
A decade ago, dozens of projects were planned but the number has shrunk to just a few ventures, which are important but not critical to help Russia maintain its output growth.
US oil giant Exxon Mobil and Italy’s Eni, for example, have dropped plans to help Russia develop offshore fields and US company ConocoPhillips sold out from Russia’s biggest private oil firm Lukoil.
The key remaining ventures involving Western companies are three projects between BP and Rosneft in East and West Siberia and a gas venture between Rosneft and Exxon Mobil on Sakhalin island.
Also on the gas front, Royal Dutch Shell and France’s Total have been considering new liquefied natural gas projects with Gazprom and Novatek, as well as a new pipeline to Europe under the Baltic Sea.
But to put the projects in perspective, the combined cost of all of them is about $50 billion — less than a 10th of the Russian oil industry’s investment program for the next decade.
And if Western institutions are wary of lending to Russia, other countries such as China have been prepared to step in. Novatek and Total, for example, launched the $27 billion Yamal LNG plant this year with Beijing’s financial support.
WEAKEST LINK
The weakest link in the Russian oil industry in the face of sanctions has traditionally been high-end Western technology such as complex drilling, hydraulic fracturing or IT, said Denis Borisov, director of EY’s oil and gas center in Moscow.
Russia’s drilling and oil servicing market is worth about $20 billion a year and the share of the market held by Western service companies has remained fairly steady over the last few years and at about a fifth.
“But the process of replacing foreign equipment with local production has gathered pace,” said Borisov.
Rosneft, which produces 40 percent of Russian oil, has recently tested its own simulated hydraulic fracturing technology — the extraction technique that spurred the boom in US shale oil production.
The technology first came to Russia mainly via major Western oil services firms such as Schlumberger and Halliburton .
Companies such as Schlumberger are still doing a lot of complex drilling work in the Caspian Sea and West Siberia for Lukoil, as well as working on the world’s longest extended reach well for Exxon and Rosneft off the Sakhalin island.
But Fitch’s Marinchenko said the reliance of Russian oil firms on Western technology has declined since 2014 thanks to imports from China and local production of drilling equipment.
Since 2014, Rosneft’s own drilling subsidiary has doubled its market share to 25 percent, meaning the company has become almost self sufficient.
“It is clear that new wide-scale sanctions on technology will not become the start of an end for the Russian oil industry, especially if Europe doesn’t join them,” said Marinchenko. “But it will complicate the development of hard to extract or depleted deposits.”

FACTOID

Ratings agencies, consultants see limited impact from bill / Russian oil firms have reduced borrowing from West / Spending funded by own cash flow, state banks and China / Technology seen as weakest link as dependence significant