Positive IMF assessment seen as vote of confidence in Saudi reform strategy

The King Abdullah Financial District station highlights the Kingdom’s focus on developing the non-oil economy. (AFP)
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The King Abdullah Financial District station highlights the Kingdom’s focus on developing the non-oil economy. (AFP)
The King Abdullah Financial District highlights the Kingdom’s focus on developing the non-oil economy. (AFP)
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The King Abdullah Financial District highlights the Kingdom’s focus on developing the non-oil economy. (AFP)
Metro lines in Riyadh are also being modernized as part of Vision 2030. (AFP)
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Metro lines in Riyadh are also being modernized as part of Vision 2030. (AFP)
A worker at the Bin Salman farm picks Damascena (Damask) roses to produce rose water and oil, in the western city of Taif, on April 11, 2021. (AFP)
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A worker at the Bin Salman farm picks Damascena (Damask) roses to produce rose water and oil, in the western city of Taif, on April 11, 2021. (AFP)
The IMF report came as an endorsement of  the Kingdom’s plans to diversify its economy and invest in non-oil sectors such as tourism and entertainment. (AFP)
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The IMF report came as an endorsement of the Kingdom’s plans to diversify its economy and invest in non-oil sectors such as tourism and entertainment. (AFP)
 Jeddah's seaside corniche has been extensively redeveloped. (AFP)
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Jeddah's seaside corniche has been extensively redeveloped. (AFP)
The oil sector, far left, has benefited from the Kingdom’s role in rebalancing global markets through OPEC+. (AFP)
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The oil sector, far left, has benefited from the Kingdom’s role in rebalancing global markets through OPEC+. (AFP)
Work on the exterior of the King Abdullah Financial District station of the Riyadh Metro in full swing on April 1, 2021. (AFP)
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Work on the exterior of the King Abdullah Financial District station of the Riyadh Metro in full swing on April 1, 2021. (AFP)
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Updated 10 May 2021

Positive IMF assessment seen as vote of confidence in Saudi reform strategy

Positive IMF assessment seen as vote of confidence in Saudi reform strategy
  • Latest assessment of the Kingdom’s economy is a vindication of Vision 2030 and the pandemic response
  • IMF has the power to deliver a positive or negative verdict on the way the economy is being run

DUBAI: Economic policymakers sometimes feel a little edgy when the International Monetary Fund (IMF) comes to town.

The 77-year-old global financial institution is not a regulator in the strict sense of the word, but it does have the power to deliver a positive or negative verdict on the way those policymakers — ministers, central bankers, and officials — are running their economy.

In extreme circumstances, the IMF can approve or withhold potentially life-saving funds from an economy in crisis. In more normal conditions, its verdict can have a big influence on the international credit ratings all countries use when accessing global capital markets.

When the IMF “mission” finished its visit to Saudi Arabia last month, there must have been at least a sliver of apprehension among economic policymakers in the Kingdom as they awaited the IMF’s formal verdict on their handling of the pandemic and its related economic shocks in 2020.




The oil sector has benefited from the Kingdom’s role in rebalancing global markets through OPEC+. (AFP)

There was no question of resource-rich Saudi Arabia seeking IMF financial assistance, but as the organization had not carried out its usual annual visit in coronavirus-ravaged 2020, there was a lot of ground to cover after a year of radical policy changes to handle the sharp recession that followed the outbreak of the pandemic.

As it turned out, there had been no need for the Saudi officials to worry at all. The “concluding statement”, when it came last week, was a ringing vote of confidence in the way they had handled the huge challenges presented by the pandemic.

More than that, it was a firm endorsement of the Vision 2030 strategy to diversify the Kingdom’s economy away from oil dependency.

Independent economists were not surprised by the IMF’s positivity. Nasser Saidi, former chief economist at the Dubai International Financial Centre (DIFC), told Arab News: “The country has been proactive in rolling out a spate of reforms despite the pandemic and lower oil prices. The public health system has proven to be resilient.”

The IMF experts were categoric. “The authorities responded quickly and decisively to the COVID-19 crisis. Strict early containment and health mitigation measures limited cases and fatalities and the vaccination program has advanced well in recent months,” they said.




The IMF report came as an endorsement of  the Kingdom’s plans to diversify its economy and invest in non-oil sectors such as tourism and entertainment. (AFP)

The experts added: “Fiscal, financial and employment support programs introduced by the government and SAMA helped cushion the impact of the pandemic on businesses and Saudi workers.”

A major reason for this performance, the IMF visitors concluded, lay in the Vision 2030 reform plan that has been in place since 2016, aiming to modernize the Kingdom’s economy and create a more dynamic, entrepreneurial private sector to take the place of government spending as the economic driving force.

“Reforms under Vision 2030 have played a key role in helping the economy navigate the pandemic. Efforts to establish a robust structure of inter-agency coordination and governance, the growing digitalization of government and financial services, reforms to increase labor market mobility, and strong fiscal and financial policy buffers, all equipped the economy to manage the crisis,” the IMF said.

All the indicators are moving in the right direction. Real GDP growth is projected at 2.1 percent this year, representing a dramatic turnaround from the 4.1 percent decline in 2020. In the critical non-oil sector — the key measure of the success of the diversification plan — real GDP growth rebounded in the second half of 2020 and the signs are that this will continue in 2021.

Non-oil growth is projected by the IMF at 3.9 percent this year and 3.6 percent next. Inflation, often a prime concern for the IMF, will be a very manageable 2.8 percent next year, while unemployment — another key indicator for the diversification strategy — fell to 12.6 percent for Saudi nationals at the end of last year.

Moreover, the role Saudi Arabia has played in the OPEC+ cuts strategy to rebalance global markets will pay off this year and next, as oil GDP recovers to 6.8 percent growth next year when oil supply returns to normal at higher crude prices.

The Kingdom’s fiscal policymakers also got a slap on the back from the IMF. “The deficit widened in 2020 to 11.3 percent of GDP (4.5 per cent of GDP in 2019) as oil revenues fell and spending needs increased, and it was comfortably financed by new borrowing and the drawdown of government deposits.” The deficit will decline to 4.2 percent this year, the IMF said, lower than the official forecast.

Some of the controversial measures introduced during the pandemic, like the tripled VAT rate, as well as the removal of cost-of-living allowances and domestic-energy price subsidies, “are all important contributors to the planned fiscal adjustment and should not be reversed or delayed.”

INNUMBERS

3.9% Projected non-oil growth this year.

2.8% Projected inflation rate next year.

The work of the Ministry of Finance was recognized by the IMF. “Steps to continue to strengthen fiscal transparency are needed, including by publishing more detailed information in budget documents and broadening the coverage of fiscal data beyond the central government,” they said.

Mohammed Al-Jadaan, Saudi Arabia’s finance minister, appreciated the IMF’s praise. “Such results have been achieved despite the impact of the COVID-19 pandemic, fluctuations in oil prices, sharp economic fluctuations, declines in global demand, receding growth and other challenges that the Saudi government has risen to,” he said in response.




Saudi Minister of Finance Mohammed al-Jadaan. (AFP)

The IMF included the Kingdom’s financial and capital markets sectors in its praise. “The financial sector continues to be well-regulated and supervised by SAMA,” it said.

“Banks are well-capitalized and liquid despite a decline in profitability and a slight increase in non-performing loans (which remain low) over the past year.”

It added: “The impressive pace of equity and debt market reforms has continued under the guidance of the Capital Market Authority and the National Debt Management Center. These reforms are increasing capital raising options for companies and investment opportunities for savers.”

Saidi, the former DIFC chief economist, said: “Saudi Arabia’s fiscal prudence has to be complimented, in addition to the efficient tapping of debt markets and structuring of key energy infra structuring to finance deficits.”

On one crucial subject — the gradual erosion of Saudi Arabia’s foreign reserves under the impact of pandemic pressures and the need for continued investment in Vision 2030 initiatives — the IMF was sanguine. “The exchange rate peg continues to serve Saudi Arabia well given the current economic structure. SAMA’s foreign exchange reserves remain at very comfortable levels,” it said.




‘Fiscal, financial and employment support programs helped cushion the impact of the pandemic on businesses and Saudi workers.’ (AFP)

There were some caveats from the IMF assessors. “To secure the recovery and spur stronger growth, policymakers need to carefully manage the exit from the remaining COVID-related support and continue the longer-term reform agenda under Vision 2030,” they said.

They also highlighted the need to continue support for the “social security net” to support low-income households which may be struggling from the effect of economic recession compounded by higher tax rates and the withdrawal of cost of living allowances.

“If the recovery stalls, the planned reduction in government capital spending could also be slowed while keeping the medium-term capital spending envelope unchanged,” the IMF said.




The IMF report came as an endorsement of  the Kingdom’s plans to diversify its economy and invest in non-oil sectors such as tourism and entertainment. (AFP)

Above all, it is important to maintain the momentum of economic reform. “Increasing the competitiveness of Saudi workers in the private sector is important to the success of the reform agenda. Developing a competitive and diversified private sector will be difficult unless the wage expectations of Saudi workers are in line with their productivity,” the IMF assessors concluded.

According to Saidi, the pace of continued growth depends on global oil markets and the future pattern of the virus, but the signs are as good as the IMF’s conclusions.

“Saudi Arabia’s growth prospects with continued macroeconomic stability and prudent fiscal stance will encourage increased domestic and foreign investment in addition to housing investment and consumption by households,” he said.

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Twitter: @frankkanedubai


Shipping industry faces ESG heat from lenders

Shipping industry faces ESG heat from lenders
Updated 10 sec ago

Shipping industry faces ESG heat from lenders

Shipping industry faces ESG heat from lenders

LONDON: Banks are demanding much stricter environmental criteria when financing shipping companies as investor pressure grows on the sector to accelerate going greener, according to Boston Consulting Group (BCG).

Shipping, which transports about 90 percent of world trade, accounts for nearly 3 percent of the world’s CO2 emissions and BCG forecast the industry will need $2.4 trillion to achieve net-zero emissions by 2050.

“ESG-driven requests are already prompting more action from banks. Shipping is already feeling it and they (shipping companies) are under pressure now,” said Peter Jameson, partner with BCG, which are consultants for the COP26 UN climate summit that starts on Oct. 31.

Standard Chartered has already provided loans linked to sustainability targets for drilling group Odfjell and the shipping division of Oman’s Asyad Group, the bank has said.

“When looking at lending on new assets, banks are going to create a bigger conduit for CO2 reductions through their policies,” Jameson told Reuters.

“The banks are also seeing insurance companies feeling shareholder pressure and this is also causing big pension funds to reassess.”

ESG-related assets under management are estimated to represent up to 80 percent of total lending to shipping by 2030, BCG said.

UN shipping agency the International Maritime Organization has said it aims to reduce overall greenhouse gas (GHG) emissions from ships by 50 percent from 2008 levels by 2050, but industry groups are calling for more progress from governments.


Global FDI flows rise by over 70% despite a divergence in inflows for different countries: Economic wrap

Global FDI flows rise by over 70% despite a divergence in inflows for different countries: Economic wrap
Updated 6 min 11 sec ago

Global FDI flows rise by over 70% despite a divergence in inflows for different countries: Economic wrap

Global FDI flows rise by over 70% despite a divergence in inflows for different countries: Economic wrap

According to UN data, global foreign direct investment flows were valued at $852 billion in the first half of 2021. This reflected a partial-year growth of 78 percent when compared to 2020.

In the US, inflows were up by 90 percent, driven by a surge in cross-border mergers and acquisitions.

However, James Zhan, the United Nations Conference on Trade and Development’s director of investment and enterprise, said that this “mask(s) the growing divergence in FDI flows between developed and developing economies.”

While FDI inflows to high-income countries leapt by a massive partial-year rate of 117 percent, low-income countries faced a 9 percent decline in inflows.

Eurozone’s construction

The euro area’s construction output fell by 1.6 percent year-on-year in August, data released by Eurostat revealed. This was driven by a 2.9 percent annual decline in civil engineering production and a 1.3 percent fall in building construction.

Construction fell the most in Spain and Romania as they saw their annual construction output slip by 13.9 percent and 7 percent respectively. 

On the other hand, Hungary experienced the highest jump in yearly construction production, growing by 10.2 percent. Poland was the second highest with a 7.9 percent year-on-year rise.

On a monthly basis, the zone’s construction also declined by 1.3 percent in August when compared to July.

European trade balances

Switzerland’s trade surplus decreased to CHF4.4 billion in September down from the all-time high of CHF4.6 billion recorded in the previous month, official data showed. 

Exports declined by a monthly rate of 0.2 percent in September. This was driven by a fall in exports to a number of countries. Most notably, exports to the US and Japan slumped by 22.2 percent and 9.6 percent respectively. 

On the other hand, imports rose by 0.9 percent to reach its highest level in 20 months. Imports of pharmaceutical products experienced the highest increase as it grew by 5.2 percent.

Meanwhile, Spain's trade deficit steeply expanded to €3.87 billion in August from a deficit of €1.73 billion in the same month last year, according to official data. 

This was the largest monthly trade deficit since September 2019 as imports leaped by 33.9 percent year-on-year to €26 billion. This was fuelled by an 11.4 percent rise in energy purchases and a 7.9 percent jump in imports of chemical products. Meanwhile, exports rose at a slower 25.1 percent growth rate to reach €22 billion.

During the first eight months of the year, Spain's trade deficit rose to €10.87 billion, from €9.6 billion in the same period a year earlier.

Indonesia’s interest rate on hold

Indonesia's central bank kept interest rates steady at its record low level of 3.5 percent on Monday. Rates remain low to boost economic activity, the bank said.

Bank Indonesia expects the economy to grow by 3.5-4.3 percent in 2021.


UK sets out net zero strategy as it gears up to host COP26

UK sets out net zero strategy as it gears up to host COP26
Updated 20 min 24 sec ago

UK sets out net zero strategy as it gears up to host COP26

UK sets out net zero strategy as it gears up to host COP26

LONDON: British Prime Minister Boris Johnson on Tuesday set out his ambition for a green revolution that he hopes will force Western economies to kick their addiction to fossil fuels.

Britain at the end of the month hosts the COP26 UN climate talks in Glasgow, Scotland, which aim to strengthen global action on global warming.

“With the major climate summit COP26 just around the corner, our strategy sets the example for other countries to build back greener too as we lead the charge towards global net zero,” Johnson said.

Johnson, who once expressed skepticism about climate change, presented his 368-page net zero strategy as a document that would put the UK at the vanguard of green economies.

“The UK leads the world in the race to net zero,” he said in the foreword to the “Net Zero Strategy: Build Back Greener.”

“The likes of China and Russia are following our lead with their own net zero targets, as prices tumble and green tech becomes the global norm,” he said.

The net-zero strategy is essentially a series of long-term promises, some with caveats, to shift the world's fifth largest economy towards green technologies — from moving to clean electricity “subject to security and supply” to “setting a path” to low-carbon heating in British homes.

It aims to secure 440,000 jobs and unlock £90 billion ($124 billion) of private investment by 2030.

It also aims to help Britain gain a competitive edge in low-carbon technologies such as heat pumps, electric vehicles, carbon capture and storage and hydrogen.

The government aims to be powered entirely by clean electricity, subject to security of supply, by 2035. It aims to have 40 GW of offshore wind power by 2030, as well as 1 GW of floating offshore wind.

Britain will also deliver 5 GW of hydrogen production capacity by 2030 while cutting its emissions from oil and gas by half.

The government aims to deploy at least 5 million tons of CO2 a year of engineered greenhouse gas removals by 2030.

Earlier on Tuesday, Johnson announced nearly £10 billion of private investment in green projects at an investment summit in London.


Indonesia plans to ‘hit the brakes’ on raw commodity exports

Indonesia plans to ‘hit the brakes’ on raw commodity exports
Updated 33 min 5 sec ago

Indonesia plans to ‘hit the brakes’ on raw commodity exports

Indonesia plans to ‘hit the brakes’ on raw commodity exports

BEBATU: Indonesia is planning to “hit the brakes” on the export of all raw commodities in an effort to attract investment in onshore resource processing and create jobs, President Joko Widodo said on Tuesday.

Indonesia has banned a number of unprocessed ore exports including nickel, tin and copper in a bid to encourage downstream industries, including producing batteries for electric vehicles and aluminum industry, among others.

The government is currently conducting a study for the downstreaming of other commodities with a long-term goal of no longer selling just raw materials, the president, who is popularly known as Jokowi, said in an interview in the village of Bebatu on Borneo island.

A new policy would hopefully emerge next year, he said.

“Don’t be surprised. We had nickel (export ban) before. Next year, we may stop bauxite, the next year we may stop something else,” Jokowi said.

Under current regulations, Indonesia will ban bauxite shipments in 2023.

Stopping exports of unprocessed palm oil was being considered, he said, although he declined to provide an estimate of when such policy could be issued.


Chipmaker GlobalFoundries targets valuation of about $25bn in US IPO

Chipmaker GlobalFoundries targets valuation of about $25bn in US IPO
Updated 38 min 22 sec ago

Chipmaker GlobalFoundries targets valuation of about $25bn in US IPO

Chipmaker GlobalFoundries targets valuation of about $25bn in US IPO

BENGALURU: Chipmaker GlobalFoundries, owned by Abu Dhabi’s sovereign wealth fund Mubadala Investment Co., is aiming for a valuation of about $25 billion in its initial public offering in the US.

The IPO, one of the most hotly anticipated listings, is expected to cap a record year for flotations, after several big names such as Robinhood Markets Inc., Coinbase Global Inc. and Roblox Corp. capitalized on the stock markets boom earlier in 2021.

Alongside electric-vehicle maker Rivian’s stock market debut, GlobalFoundries is expected to headline an unusually crowded year-end IPO schedule.

IPOs in the US have already touched an all-time record of over $250 billion this year, according to data from Dealogic.

In a filing to stock exchanges on Tuesday, GlobalFoundries set a price range between $42 and $47 a share for its stock market flotation. At the upper end of the range, the company is expected to raise about $2.6 billion.

Including the “greenshoe option,” which allows companies to sell additional shares during an IPO, GlobalFoundries could be valued at about $26 billion.

Mubadala, which is selling 22 million shares in the IPO, will hold an 89.4 percent stake in GlobalFoundries and control 89.4 percent of the voting power, following the listing and the private placement, according to the latest filing.