A report on the National Transformation Program (NTP 2020), has predicted that its implementation will improve the Kingdom's macroeconomic performance over the next five years. The report, released by Jadwa Investment, states: "We see a moderation in overall economic growth during 2016, before a pick-up in 2017 takes place, as the impact of NTP initiatives start to be felt. Real GDP growth is likely to slow to 1.7 percent in 2016, before picking up to 2.4 percent in 2017." The NTP 2020, announced by the Council of Ministers on June 6, 2016, ushers in a major new policy era designed to overhaul the economy. According to the report, its total cost of SR447 billion will be borne by both the public and private sectors. "Public funding for these initiatives will utilize previous budget allocations as well as new spending from the budget," the report adds. As per the report, the two largest government bodies to receive public funding as part of the NTP will be the Ministry of Housing and the Royal Commission for Jubail and Yanbu, taking up a combined SR100.8 billion. The report adds that the recent flow of data has generally been stronger than anticipated, leading to improved forecasts for fiscal and external balances. Jadwa Investment revised their 2016 and 2017 forecast for the fiscal deficit to –SR283, and –SR210 billion respectively. The report says, "Higher oil revenues will lead to smaller deficits than our earlier forecast, and the consolidation in the Kingdom's finances is expected to be achieved at a much faster rate than what we anticipated previously. These factors should help with a notable improvement in the deficit over the next few years." According to the report, credit growth is expected to remain resilient despite the slowdown in monetary aggregates, thus ensuring support in non-oil growth, with the services and retail sectors in the lead. The report also says, implementation of the NTP will improve the Kingdom's macroeconomic performance over the next five years. We believe that the willingness and determination to expand opportunities in the non-oil economy will mean that growth will become more driven by private sector activity rather than the oil sector or public spending patterns, as history had shown. NTP's focus on private sector partnerships, local content improvement in various sectors, and job creation will be major overarching objectives that will be measured against. The basic essence of the NTP and how it pushes for institutionalizing systems, promoting transparency, and offering specialized support through a clear operating model, will contribute significantly in ensuring that plans are implemented, and growth is achieved. We believe that 2016 will not be impacted by NTP initiatives and therefore forecast the slowdown in activity to persist this year. However, the impact of the NTP will start being felt in 2017, with growth, fiscal, external, and monetary indicators posting a gradual recovery in following years as well. Real GDP growth to slow in '16, followed by a pickup in '17 We forecast real GDP growth to reach 1.7 percent, and 2.4 percent in 2016 and 2017 respectively, down from 3.5 percent in 2015. We see a moderation in overall economic growth during 2016, before a pick-up in 2017 takes place, as the impact of NTP initiatives start to be felt. Annual oil sector GDP growth is forecast to slow to 0.9 percent in 2016, down from 4 percent in 2015. This is mainly due to a lower growth in oil production as competition from OPEC and non-OPEC sources keeps oil markets well supplied. Our forecast for non-oil private sector GDP is 2.4 percent for 2016. Data for the first half of 2016 showed a slower expansion in the non-oil economy compared to previous years, with PMI averaging 54.4 year-to-May, compared with 58.2 during the same period in each of the previous three years. However, the ongoing resilience in bank credit to the private sector (up 10.4 percent, year-on-year in April) particularly towards service based sectors, and continued level of high government spending on salaries and wages, will ensure that growth in the non-oil economy will remain healthy in 2016. A recovery during 2017 will be driven by changes in oil production and oil sector growth, as we see oil sector GDP rising to 2.1 percent. We forecast non-oil private sector GDP growth to also accelerate to 2.8 percent in 2017, mainly due to an expected improvement in private sector activity as it starts benefitting from an increasing number of opportunities made available by the NTP. This includes FDI attraction as part of opening up the retail sector to investment by foreign entities, as well as a pick up in construction activity to develop empty land plots in response to the likely imposition of white land fees by the government. That said, consumption oriented sectors will continue to benefit from high consumer spending. Fiscal and current account deficits to shrink We revised up our 2016 and 2017 forecast for the fiscal deficit to SR283 (12 percent of GDP), and SR210 billion (8 percent of GDP) respectively. Higher oil revenues will lead to smaller deficits than our earlier forecast, while the consolidation in the Kingdom's finances is expected to be achieved at a much faster rate than what we anticipated previously, which should help with a notable improvement in the deficit over the next few years. Further, the NTP targets a balanced budget by 2020, and we see the pace of consolidation in spending consistent with the longer-term targets specified within the NTP. We also expect the current account deficit to be smaller than what was anticipated earlier, mainly owing to higher oil revenues, and have revised down our forecast for the deficit in 2016 from $77 billion to $56 billion (8.8 percent of GDP). In 2017, the deficit will shrink further to $27 billion (3.9 percent of GDP). We expect that beyond 2017, strategic objectives specified in the NTP towards increasing local content and improving non-oil exports will contribute significantly in improving the current account balance, as well as placing it at a more stable trend than what has been the norm in the past, particularly since this set of initiatives would move the Kingdom away from oil dependency and towards diversification. Global economic growth in the first half of the year has been slower than expected, risk appetite in financial markets has fallen and volatility has accelerated again. We remain concerned about the continued volatility and tightening of global financing conditions, which could be triggered by an upward shift in market expectations of official interest rates. However, the implications for the Kingdom should not be exaggerated, as markets need to differentiate the Kingdom's strong fiscal buffers and determination for reform from other vulnerable economies. That said, any delay in implementing the key initiatives in the NTP could pose downside risks to our baseline forecast.
