IMF: KSA reform program in right direction but needs to ‘scale up’

Jihad Azour, the IMF's Mideast and Central Asia director, talks during his press conference in Dubai. (AP)
Updated 14 November 2018
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IMF: KSA reform program in right direction but needs to ‘scale up’

  • IMF expects the Saudi economy to grow by 2.2 percent this year
  • Privatizations could have beneficial impact says analyst

DUBAI: Saudi Arabia’s reform process is heading in the right direction, but the Kingdom needs to “scale up” in certain areas of the economy, according to the International Monetary Fund (IMF).
The IMF’s director for the Middle East and Central Asia, Jihad Azour, told journalists in Dubai that prospects for foreign direct investment — which the Kingdom has sought to attract in its strategy to get away from oil dependency — would benefit from more government measures to increase public sector involvement.
“The fiscal reform process is heading in the right direction, but improving employment prospects are subject to continued structural reform and the Vision 2030 program. Allowing women to drive is expected to have a positive effect on growth, but more progress is still needed and it needs to scale up, especially in education for local skills, and allowing small-to-medium enterprises to grow with access to finance,” he said.
On foreign direct investment (FDI), he said the oil industry had its own dynamic, but that other sectors were still dependent on public investment, and FDI would come if there were more opportunity in the private sector and in SMEs.
Azour made the comments in Dubai in the course of his twice-yearly regional economic outlook, which forecast economic growth across most of the region — with the exception of Iran — but warned that Middle East economies faced “gathering storm clouds” from global macro-economic issues and from oil price volatility.
“Global growth remains strong, but there are troubling signs ahead. Growth has become uneven; trade barriers and tensions are increasing; financial market conditions have tightened; and investor sentiment is volatile and uncertain. This changing global economic environment is bringing new challenges for the countries in the region,” he said.
In the oil-exporting Arabian Gulf countries, overall growth would resume this year following a contraction in 2017, with the IMF forecasting 2.4 percent for 2018 and 3 percent next year. “Higher oil prices and a slower pace of fiscal consolidation are boosting near-term growth prospects,” Azour said.
Saudi Arabia growth would be 2.2 percent this year and 2.4 percent next, the IMF is forecasting. For the UAE, the figures are forecast at 2.9 percent this year and 3.7 percent next, with Dubai projected at 4 percent in 2019.
“The outlook on Iran has been significantly downgraded as a result of the re-imposition of US sanctions, which are anticipated to lead to a drop in oil production and exports in the coming years,” he added. Inflation could reach 35 percent next year.
However, he said that Iranian sanctions might not be a “big negative” for neighboring countries in the Middle East because many did not rush to increase trade or financial flows after the sanctions were relaxed in 2015.
In the oil-importing economies, the IMF said that overall economies are expected to grow 4.5 percent this year and 4 percent in 2019. But there were great variations across the non-oil regions of the Middle East. Egypt was forecast to grow its economy by more than 5 percent, but many oil importers would grow at less than 3 percent.
“Rising oil prices have added to fiscal pressures in many oil-importing countries, leading to an uptick in energy subsidies,” Azour said.
The IMF executive said that there was the prospect of “reform fatigue” in many counties in the region against the backdrop of slower economic growth.
On the prospects of as global trade war between the US and China, he said that the direct impact on Middle East countries would be small, but that the indirect effects — in the form of slower global economic growth and lower oil prices — could be big.
Razan Nasser, senior economist for the Middle East at HSBC, said that FDI had been in decline in Saudi Arabia for some time and, despite successes in attracting capital to the country’s markets via the upgrade to emerging markets status, it was not an easy task to attract a long-term productive capital.
Salman Jeffrey, chief business development officer at the Dubai International Financial Center, said Saudi Arabia’s privatization plans were crucial in attracting foreign investment into the Kingdom.
“You have to pin your hopes on the privatization program coming through. Once you get one or two (privatizations) in the pipeline you will see a significant effect,” he added.


Idle India plant victim of Modi policy moves

Updated 48 min 30 sec ago
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Idle India plant victim of Modi policy moves

  • Ban on high-value banknotes and goods and services tax has reduced demand

NEW DELHI:  It was supposed to be Johnson & Johnson’s biggest manufacturing plant in India. It was to eventually employ at least 1,500 people and help bring development to a rural area near Hyderabad in southern India.

Yet, three years after the US health care company completed construction of production facilities for cosmetics and baby products on the 47-acre site, they stand idle.

Two sources familiar with J&J’s operations in India and one state government official told Reuters production at the plant, at Penjerla in Telangana state, never began because of a slowing in the growth in demand for the products.

One of them said that demand didn’t rise as expected because of two shock policy moves by Prime Minister Narendra Modi: A late 2016 ban on then circulating high-value currency notes, and the nationwide introduction of a goods and services tax (GST) in 2017.

J&J spokespeople in its Mumbai operations in India and at its global headquarters in New Brunswick, New Jersey, declined to respond to a list of questions from Reuters.

Modi’s office did not respond to a call and an email with questions.

Aimed at rooting out corruption and streamlining the tax system, the double whammy of “demonetization” and GST, were two of Modi’s signature policy moves. But instead of encouraging economic activity as intended, they did the opposite, at least in 2016-2018, by sapping consumer demand, according to some economists.

Many businesses, especially small and medium-sized enterprises, complained publicly — some in their financial statements — that they suffered a drop off in orders. The suspended J&J project stands as one of the most vivid examples of the impact on the broader investment picture.

In the first month after demonetization, some business surveys showed that sales of products such as shampoos and soap fell more than 20 percent.

Indian Prime Minister Narendra Modi makes a press statement in New Delhi last month. (Reuters)

Lack of jobs growth and a farm-income crisis because of low crop prices have hurt Modi in the current general election, according to several political strategists.

Still, Modi and his ruling Hindu nationalist Bharatiya Janata Party are expected by many of the strategists to be in a position to get a second term — probably with support of some other parties — when votes are counted on Thursday, partly because of his strong stance on national security issues.

A range of Modi’s business policies, such as capping prices of medical devices, forcing tech companies to store more data locally and stricter e-commerce regulations have in the past two years hurt plans of American multinationals such as J&J, Mastercard, Amazon and Walmart-owned Flipkart.

The groundbreaking of the J&J facility in Penjerla, its third in the country, was carried out with much fanfare in 2014, attended by Telangana state’s Chief Minister Chandrashekar Rao, who hailed the foreign investment as a big win for local communities.

A document dated April 2017 that lists products the company planned to make at the facility, submitted to the Telangana government and reviewed by Reuters, names baby oil, baby shampoo, baby lotion, baby hair oil, face wash and creams.

Shaukat Ali, running a tea shop under a bamboo stall on barren land outside the plant, said local workers check in routinely for possible vacancies at the J&J site, but nothing has come up in years.

At the local pollution control board office, the member secretary Satyanarayana Reddy said the J&J plant had all the required approvals and he was not sure why it hadn’t started production.

“It is unusual for such a big plant to stay idle for so long,” he said. “But there is no problem from our side.”

Chandrasekhar Babu, an additional director at the Telangana industries department, said a J&J company official told him the plant hadn’t started due to lack of demand.

GST and demonetization were two key reasons the plan didn’t kick off, one of the sources said, adding that lack of consumer demand since then dented company’s plans.

The second source familiar with J&J’s plans said the company miscalculated Indian market demand.

On a recent visit by a Reuters reporter to the J&J plant, plush, furnished conference rooms and cubicles sat inactive; M. Sairam, who said he was the site manager, told Reuters production areas with machines were idle too.

Local officials had hoped the initial J&J plant would be only the beginning. After the groundbreaking in 2014, Pradeep Chandra, who was Telangana’s special chief secretary of industries, told Business Today magazine that “based on the extent of land (J&J) have acquired we believe that they are looking at much larger expansion here.”

Local media reports at the time said the J&J facility would employ some 1,500 people.

A J&J official, who was not identified by name, was reported subsequently in December 2016 in India’s Business Standard as saying that the $85 million plant would be operational by 2018 after it had overcome procedural delays. The official was quoted as saying the company had earmarked an additional $100 million for expansion.

Vikas Srivastava, the managing director of J&J Consumer (India), who was at the 2014 groundbreaking, did not respond to calls for comment.

Reuters also talked to two workers outside a sprawling Procter & Gamble facility making detergents and diapers, which is next to the J&J plant. They said they were part of the P&G plant’s production team and the plant had been running below capacity.

A P&G spokesperson denied that, saying the plant was “operating at full capacity.” 

“India is a priority market for P&G globally and in recent quarters, P&G’s business in India has registered strong double-digit growth consistently,” the company said.

The weak rural economy, where most Indians work, has also hurt growth in sales of basic items such as detergents and shampoo in the past year.

Hindustan Unilever Ltd, an industry bellwether that would compete with the likes of J&J and P&G in some categories, said its volume growth shrank to 7 percent in the quarter ended March 31, down from double-digit growth in the previous five quarters. The company warned that the daily consumer goods segment in India was “recession resistant ... not recession proof.”