Saudi Plans More Bond Sales, Cheap Loans for Job-Rich Industries

(Bloomberg) -- Saudi Arabia may offer “almost interest-free” loans to companies in labor-intensive industries as part of a plan to stimulate an economy squeezed by low oil prices and spending cuts, Finance Minister Mohammed Al-Jadaan said.

Al-Jadaan, speaking in an interview in Washington, also said the government is on track to slash its budget deficit by 30 percent this year to about 200 billion Saudi riyals ($53 billion), and aims to finance it mainly through debt sales instead of drawing on reserves. This means the kingdom will likely tap global bond markets again this year after raising $9 billion from its debut Islamic debt sale, he said.

Saudi Arabia has embarked on what it describes as an unprecedented shakeup of an economy that’s heavily reliant on oil. The so-called Vision 2030, spearheaded by Deputy Crown Prince Mohammed bin Salman, was announced last year and includes plans to sell shares in state companies and curb government spending on subsidies and wages.

Austerity and low oil prices have led to the worst economic slowdown since the global financial crisis. The International Monetary Fund expects growth to slow to 0.4 percent this year from 1.4 percent in 2016 after the kingdom agreed on oil-output cuts with other OPEC members.

“The government recognizes that there is a slowdown,” Al-Jadaan said. “Our projections are a little bit more optimistic than the IMF. We are targeting modest growth this year and next year.”

Job Creation

The Saudi plan also places a strong emphasis on creating jobs for the kingdom’s youthful population. On Thursday, Saudi authorities said that foreigners will be barred from working in shopping malls, a move expected to put 35,000 Saudis into work.

Al-Jadaan said the government will use revenue from a recovery in crude prices to support the non-oil economy, the main engine for job creation. Officials are currently in talks with private companies about government support, which would include loans to help them restructure debt, easing the impact of higher domestic energy prices as subsidies are cut.
The proposal will likely be ready by the end of the second quarter, he said.

Authorities are also asking companies “what do you need from the government side, what are the issues you’re suffering in terms of licensing, procedure?” the minister said. Saudi Arabia’s non-government economy grew just 0.1 percent in 2016.

Easier Rules

Policy makers are also speeding up the approval process for projects.

“We used to review all contracts before they are signed by any government agencies if they are more than 300,000 riyals,” Al-Jadaan said. “We’ve changed that to avoid unnecessary delays. It’s now 5 million, and only for more than a one-year term.”

Projects that are part of Vision 2030 and cost 100 million riyals no longer require an approval from the royal court. “They just need to notify us.”

Prince Mohammed’s plan would introduce value-added taxation, higher visa fees and a levy on expatriates, to reduce revenue-dependence on oil. Al-Jadaan said the government was “absolutely” determined to implement the VAT on Jan. 1, 2018. Other measures are also on track, he said.

Debt Markets

In the meantime, the government will rely on local and international bond sales to finance a narrowing budget deficit, instead of using reserves, Al-Jadaan said.

“Logically, absent other factors, you would prefer to keep your reserves. They are a good cushion -- whenever you go to the market for debt you can point to your reserves,” he said. “If the market allows, and so far the market has been very positive, we will go with debt.”

The government didn’t tap the central bank’s foreign-exchange holdings in the first quarter of this year, and the decline in reserves in the first two months may have been a result of private companies settling overseas bills or financing imports, Al-Jadaan said.

Net foreign assets held by the Saudi central bank have fallen by an average $6.5 billion a month over the past year, and now stand at just over $500 billion – having peaked at $737 billion in 2014 when oil prices were above $100 a barrel. The drops in January and February were 11.8 billion and $9.8 billion respectively.

Last year, the government transferred 100 billion riyals from its reserves to the Public Investment Fund, the kingdom’s sovereign wealth fund. “There were opportunities in the local economy that the PIF identified,” Al Jadaan said.

Asked if there are plans for more such transfers, he said: “I don’t think there is any at the moment.”

To contact the reporter on this story: Alaa Shahine in Dubai at asalha@bloomberg.net.

To contact the editors responsible for this story: Sarah McGregor at smcgregor5@bloomberg.net, Alaa Shahine at asalha@bloomberg.net, Ben Holland, Stuart Biggs