Transcript

Transcript of the IMF Press Conference on the IMF’s annual assessment of the Saudi Economy

August 18, 2022

Speakers:

Amine Mati: IMF Mission Chief for Saudi Arabia

Wafa Amr: Senior Communications officer

Washington, DC

August 17, 2022

AMR: Good morning and good afternoon everyone. I am Wafa Amr, Senior Communications Officer at the IMF. Thank you for joining our press conference on the IMF’s annual assessment of the Saudi economy. I am pleased to introduce Amine Mati, mission chief for Saudi Arabia who will start by giving short opening remarks then we will take your questions.

The press conference will be held in English and we have simultaneous translation in Arabic.

AMINE: Good morning or Good afternoon if you are following us from the Middle East. Thank you to all for joining us for our briefing on the conclusion of the Article IV Consultation with Saudi Arabia. As you will see from our just published reports, our findings clearly indicated that:

Saudi Arabia is recovering strongly from the pandemic-induced recession. Higher oil prices provide an opportunity for accelerating further the strong reform drive brought about under Vision 2030.

• Growth, driven by both oil production expansion and a continued robust non-oil recovery, is expected to pick up strongly this year to 7.6 percent. On the back of sustained oil output, higher oil prices than previously forecasted and strong reform implementation will support non-oil growth over the medium term. Risks to the outlook are balanced.
• Inflation , is contained despite increased international commodity prices because of low pass-through.
• The external position is expected to strengthen substantially, with the CA surplus reaching levels not seen in a decade. The exchange rate peg to the U.S. dollar continues to serve Saudi Arabia well given the structure of the economy.
• The 2022 fiscal outturn will overperform the budget, with the spending ceilings specified under the medium-term fiscal framework remaining appropriate to sustain the fiscal adjustment while allowing for increased and targeted social spending. Fiscal consolidation should continue to be pursued through non-oil revenue mobilization, energy price reforms, and the continued rollout of transformative structural fiscal reforms already initiated under vision 2030. Implementing a fiscal rule would help sustain a fiscal anchor over the medium term. An integrated asset-liability management framework would help the government assess Saudi Arabia’s fiscal stance and position.
• Macro-financial systemic risks are low , and continued improvements in Saudi Arabia’s financial sector regulatory framework would be important.
• All these reforms need to be accompanied by the continued pursuit of structural reforms under Vision 2030. Significant steps have been taken to improve the regulatory and business environment, attract foreign investment, and create private sector employment. Priorities to foster a more inclusive and green economy include increasing further women labor force participation, making sure PIF interventions play a catalytic role, strengthening governance, and rolling out the Saudi green initiative.

Q&As:

AMR: Thank you very much. We will now turn to your questions.

QUESTIONNER: What’s your recommendation on the achieved utilized surplus?

AMINE: The surplus this year that we're projecting is about 5.5% of GDP. What we've seen in terms of developments in Q1, Q2 bode well for that. And I think one good thing to note about this budget surplus is that you've seen both an increase in oil revenue, but also that the strong performance that we had seen in the past on non-oil revenue is continuing, and our advice has been to try to respect the spending ceilings. I think that too on making sure that the budget allocations are respected for the year, allowing for higher social spending, you know, to address the food subsidies and other social safety nets that need to be expanded to deal with the impact of higher commodity prices on more vulnerable and otherwise, continue to based on respecting the spending. And you've seen that or the Q2 numbers, wage and compensation, for example, have stayed in line. We've seen some slight increase on operational expenses in line with inflation and there may have been some increase in capital spending advancing some of the program spending that were planned for the rest of the year. But we do expect spending more or less, you know, with some of the social spending to be increased, to remain broadly in line with the budget whereas revenues to be significantly higher hansol projection for 5.5% of GDP in 2022.

QUESTIONNER: Are there any recommendations from the IMF on the VAT whether to raise it or lower it or other taxes liabilities on mortgages?

AMINE: Thank you for your question. On the V.A., you know, significant reform has been undertaken by the kingdom. And under challenging circumstances, you've seen the VAT rate that has been tripled even during COVID. That has brought a significant increase in overall revenue. You've seen non-oil revenue mobilization that has doubled over the past four years. This is also in line with the kingdom's revenue diversification efforts.

So our advice is to maintain the VAT rate at 15%, which is still below some of the, you know, emerging market VAT rate, tax rate. So we think that 15% is appropriate and to continue maintaining it. are there, you know, 12% of GDP non-oil revenue? As you can see from our report, we still think that there is room to grow. The authorities agree. And we think, you know, looking at different taxes would be one way to look at it. You know, there's different possibilities here. Taxes on income and property. Taxes on property, which is not existent. Those are all avenues that should be explored going forward. But let's not forget that there is a lot that can be done also on tax administration, continuing the effort on expending taxpayer registration, on expanding and improving arrears management and collection could go hand in hand in helping increase non-oil revenue movement.

QUESTIONNER: My question is on diversification. How well are diversification efforts going and are there any real signs of economic growth that are not related to boom in oil prices and can you name sections you have found acceleration in non-oil?

AMINE: Look on diversification. This has been the long standing efforts from 2000 2020 to 2020. If you look at the Saudi economy, you've seen almost a 20 percentage point decrease in the direct share of oil in GDP, in the share of oil in total revenue collection, and slightly less in terms of exports. So that has been longstanding, but that has accelerated since 2016 with the implementation of Vision 2030. Now, in terms of the sectors that have grown, we've seen that there's been some move into more complex sectors. Of course, some of them, as you said, linked to the oil in terms of chemicals. We've seen, you know, the retail and services trade that has increased and we've seen that, you know, this board here, continuation of the past and also a boom post-COVID as the economy fully rebounded. We've seen some of those sectors going up. We've seen some of the manufacturing sectors also increasing and we've seen some start. We think the potential going forward would be more in agro processing and some plastics and some of those industries. But it's like quite a lot to be done. The financial sector is also another area where we've seen some of the growth and we expect that with the digitalization of the economy and some of the new projects being put in place that will have the diversification. I mean, diversification is also going to come with the investments being made today for some of those industries. So it's a process that has taken time and we've seen the acceleration over the past four years. And I talked earlier about the non-oil revenues, which means that you have also other sectors of the economy developing, and you have other industry that are starting to take place, but that will take time to fully develop. And of course, you know, the real estate market is growing very fast. We've seen that with mortgages increasing, that is, and with construction remains a big contributor to growth.

QUESTIONNER: What are the steps needed to strengthen reforms and given rising inflation globally, do you expect a spillover in the Saudi economy?

AMINE: Thank you very much as two questions here. On the steps needed to reinforce the Saudi economy, I think what's important in our view is to make sure that the higher oil price is, that the structural reforms are continuing irrespective of oil price developments. And as a whole, reform momentum with many committees going is like, you know, a strategic management office looking at some of the reforms and Vision 2030. There are different objectives. Under different reforms, it's important that they be continued and accelerated. And here we are talking about reforms from the public financial management reforms and there's a lot that has been happening on the budget reforms, on budget execution reforms, on making sure you have the right project selection and the right project execution in terms of investment and maintaining a strong financial sector reform, maintaining the fiscal discipline. And last but not least, making sure that all the structural reforms that have started and have transformed Saudi Arabia, let's say labor force participation of women and labor market reforms that have been undertaken, the drive towards privatization, the changes in the regulatory environment. And today you can open a business or register business in 3 minutes. All of those steps need to continue to try to attract private sector investment and generate a more inclusive growth. On rising inflation. Inflation Saudi Arabia is quite contained inside. We are projecting it up 2.8% in 2022, today at 2.3%. And if you look at our report, we have quite a detailed analysis both on inflation and also the impact of Fed tightening on the Saudi economy. And what we found is that the increase in the interest rate in the U.S., given that Saudi Arabia is a big Saudi Arabia, will also follow with increasing interest rate. But the impact on the banking sector is positive because a large part of the of the deposits in in the banking system are non remunerated, the demand deposits and therefore you have positive net interest margin and in a context of high liquidity and oil price, the effect on the economy both on private sector credit or non-oil growth more general is quite muted and we found that there is a threshold price of about $45 a barrel. So at this stage we expect the impact on inflation to Saudi Arabia to remain muted. And you've seen also you would see no analysis that we calculated the pass through of international for an increased international oil price and increase international food price on the Saudi economy. And that was found to be not significant. Thank you.

QUESTIONNER: What are your expectations for the tourism sector?

AMINE: Tourism sector is an increasingly important sector. There's you know, we are expecting it to play to have a higher share in terms of GDP or growing like above 5% of total in terms of GDP at this stage. You've seen that there's a lot that is being developed, including, for example, the very successful Riyadh Seasons Festival that are developing a lot of entertainment and events. And this is an area where we expect more to come, and that's in addition to the strong contribution already from Hajj and Umrah that Saudi Arabia has every year. And we've seen a pick up this year. We expect to pick up to seen the numbers, much more of a pick up this year following a full reopening and after the restrictions that were put in place for COVID 19 have been fully lifted.

QUESTIONNER: There are fears of recession growing. Your GDP forecast for this year year and next, is there a downward revision if inflation fears materialize and at what magnitude?

AMINE: Thank you very much for your question. At this stage, we are not anticipating or we are not planning on a revision, that is too early. We will see where the numbers would be before next WEO forecast. If you look at if you were to agree at 7.6% for growth, we have already, you know, 13, 14% growth in oil planning 2022. This, by the way, did not fully account for the small increase already in opec+ on oil production. So there is an upside risk there. And we will see what happens in in discussions with Opec+ on that front. And then on the non-oil, if you look at PMI indicators and if you look at where growth has been over the past two quarters, it's been quite positive and continues to be so. So for 2022, we at this stage do not expect any changes. We will see the developments for 2023. We have a growth rate at 3.7%. We expect that the developments on non-oil economy, including the planned investments to continue and therefore some of this positive impact on the economy that we are seeing in 2022 to also continue 2023. So at this stage, we think that as we said, you know, in our report, that the risks are balanced and that we are given the information we have at this stage the forecast is what it is. But we will review that later if numbers are revised down further..

QUESTIONNER: what are the chances of renewable energy in the kingdom. Also the IMF has changed its previous forecast in April of 3.6 % of GDP. What is the reason for this change?

AMINE: On the renewable energy, there's a whole program that the government is putting in place to reach its target of 50% by 2030. It is quite a challenging mark to reach today. The capacity on renewable energy is about 700 megawatt, about 1%. Therefore, it's quite a leap to get there and there will be investments that will be needed in these areas between $50-$100 billion a year. There are already some plans that have been announced to increase the gigawatt capacity over the next year or two and then a whole plan over until 2030 now. And we expect some of the details to come on this front, to also be coming out in the detail of the Green Energy Green Initiative that will be unveiled even more in November of this year at COP 27. Now, on the growth 3.6 to 3.7, I think this does reflect that we expect the reform momentum to be to continue and that some of the impact of the investments to also be reflected in non-oil economy going up. You can see from our numbers that we don't expect a jump in oil production next year. We kept it at about 11.4 million barrels a day. And therefore, most of that is from the non-oil economy where we expect manufacturing, retail and others to continue growing strong next year.

QUESTIONNER: My question is regarding your advice on energy prices reforms.

AMINE: Our advice. Next step back on energy price reforms. First, let's recognize that a lot has been done by the kingdom. If we were to look at energy subsidies, these have been half over the past decade. Energy subsidies today, let's say, on fuel, is about 5%. You've seen that in some of the Aramco financial statements. These our recommendation is to sort and the authority's plan is to continue removing these subsidies so that by 2030 there are no more subsidies and that domestic fuel prices reach international levels. All right. Our advice is to continue increasing the prices maybe at a step, at a faster pace, to generate gains and savings that could be reinvested directly into the economy. At the same time, while protecting the most vulnerable households. And for this, you know, there's been a lot that has been done in strengthening the social safety nets in Saudi Arabia. We have the demand program that targets the people in need guaranteeing a minimum income. We have the citizens account that have been put into place and those we think would be appropriate compensating mechanism to offset the impact of higher energy prices. Now on the impact on the economy, this will affect certain sectors. This will increase the production cost, but that will also make it more efficient overall in the economy because the savings that you get from the energy price subsidies can also be put for other investments and other programs that would benefit the economy.

QUESTIONNER: How will political turmoil in the region impact the region’s economy and that of Saudi Arabia?

AMINE: Can you define what you mean by political turmoil? Well, at this stage, you know, I think if we were to look at the economic, situation in the kingdom, you know, it is pursuing its own, it is pursuing its reform agenda. It is benefiting today from higher oil price and higher oil production. And we think that this will continue to have a positive impact on the economy. And, you know, irrespective of what is currently happening in, the in the region, although Saudi Arabia is playing a role in providing some financial support to some of the countries in the region.

-QUESTIONNER: What is your advice and recommendation on the VAT and imposing other taxes?

AMINE: So hopefully I'll be consistent with what I said earlier. So our advice is to you know, what I'd said was that there's been quite a lot that was done on the VAT front, which was a big part of the kingdom's non-oil revenue diversification. VAT rate was increased from 5 to 15% during a difficult situation, you know, is in the middle of COVID. That VAT rate was tripled. That brought quite a lot of non-oil revenue. You've seen non-oil revenue that has tripled over the past four years. This is an important reform. We think it's important that the VAT rate be maintained. Now, is there more room to go in on oil revenue? Yes, we've seen that the tax gap is about has been reduced compared to what it was before. It was about 15% of GDP. Now it's 10% of GDP. Therefore, there's still quite a lot of room to be made despite the progress made to reach international levels on non-oil revenue. Are there avenues of reform that could be explored? We think that taxation on income and profits or property taxation, for example, which are negligible, could be avenues to explore. But these are different options that could be looked at. At the same time, it's important to keep in mind that no new revenue mobilization efforts are not just tax policy measures, but also tax administration measures. And here, it's important that taxpayer registration be continue to be enhanced. That is proper arrears management, proper audits to ensure that collection is also continuing to improve. And in many countries, we've seen that that will help sustain the non-oil revenue collection.

QUESTIONNER: How could the digitalization attract major international firms to achieve objectives of the kingdom. The Saudi Green initiative, how will it serve the region and the country?

AMINE: On the digitization effort. Look, I mean, if you look at digitization, it is a boost for growth. It also means that you have a more educated workforce and that will be able to follow up on the technologies of the future. That is always a source for investment. It also means that there's a lot more efficiency, both in government procurement, in how projects are being executed. All of those would be positive for any FDI. And, you know, if you go to Saudi Arabia today, you've seen so many applications and digital applications for many fronts, and this really pushes the technology forward. And then maybe I'll make a Segway to the Green Initiative, because you've also seen that Saudi Arabia is investing in electric vehicle plants, and we do see it coming. So these are all positives for FDI and for the infrastructure projects going forward. Now, the Saudi Green Initiative is a positive initiative for Saudi Arabia and the region. I mean, again, this deals with both climate mitigation and climate adaptation. In this strategy, there's a push for renewable energy, a push so that the oil is also being reused, capital with the circular economy, and therefore the oil production will still be around for the region. But then making sure that the emissions themselves are being reduced is part of the strategy. And then this, you know, brings the energy companies, you know, part of the renewable mix, which is the future is going to be part of Saudi Arabia's strategy going forward. At the same time, on adaptation, there's a whole campaign on, you know, increasing vegetation and the 10 billion trees, etc.. By 2030, all of that would be positive to limit the effect of climate change on Saudi Arabia. So that would be quite positive.

QUESTIONNER: Wat are the economic sectors that will have fastest growth and which will recede and why?

AMIE: In terms of sectors that will grow. You know, we still think that, you know, clearly retail, manufacturing, the whole services industry is something that is expanding tremendously. In in Saudi Arabia, I talked earlier about the events surrounding the Riyadh seasons and how tourists within Saudi Arabia are developing hotels. The infrastructure that surrounds that and the services surrounding that will keep expanding and generating growth. I think construction will continue, given the strong demand for mortgages and for home ownership, and as the new industries and sectors we grow, agro processing would be also in other areas. And of course some of the oil derivatives, you know, and chemicals, plastics, etc., will continue to grow. You know, at least in the in the near term at this stage.

AMR: Well, we have no further questions. I would like to thank you all for joining the press conference. The transcript will be placed on the IMF website.