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Abu Dhabi, UAESunday 16 December 2018

Saudi economic reforms, new regulations to hurt telecom sector, report says

But inclusion in emerging market indexes will help boost stock valuations

Saudi Telecom Company, Mobily and Zain are expected to be included in FTSE and MSCI EM indices, said NCB Capital. Waseem Obaidi for The National
Saudi Telecom Company, Mobily and Zain are expected to be included in FTSE and MSCI EM indices, said NCB Capital. Waseem Obaidi for The National

Saudi Arabia’s telecom sector profitability will be hurt this year by reforms being undertaken in the kingdom and changes in policies of the telecom regulatory authority, according to a new report from NCB Capital, the investment arm of Saudi lender NCB.

NCB Capital is forecasting a 1.4 per cent drop to 9.3 billion Saudi riyals (Dh9.1bn) in the net income of the sector this year compared with 2017.

“We believe the outlook for the Saudi Telecom sector is muted due the impact of the economic reforms and Communications and Information Technology Commission’s (CITC) new regulations.,” said the report. “However, we expect the potential inclusion to EM indices will continue to drive stock prices going forward.”

Saudi Arabia is undertaking reforms to help shore up government revenue hit by the oil price slump since 2014 and to create new revenue streams other than oil income. It introduced an excise tax last year and 5 per cent VAT this year to help beef up state income, as well as undertaking other measures that are expected to increase the inflation rate and hurt consumer spending.

But index compiler FTSE Russell’s decision last month to upgrade Saudi Arabia to emerging market status is expected to buoy the Tadawul stock exchange and channel foreign investor money into blue-chip stocks. A possible inclusion of Saudi Arabia by rival index complier MSCI in its widely tracked Emerging Market index in June would give a further boost to the Arab world’s biggest stock exchange with a market capitalisation of around $500bn.

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Read more:

FTSE upgrades Saudi Arabia to emerging market status

Saudi stocks will have potential 2.3 per cent weighting on MSCI Emerging Markets Index

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“Saudi Telecom Company, Mobily and Zain are expected to be included in FTSE and MSCI EM indices,” said NCB Capital. “This is expected to drive their stock prices for the next 14 months, until the inclusion happens and implementation is completed. The stock prices are expected to move away from fair value, driven by momentum due to increased inflows during this period.”

NCB is projecting a 2.9 per cent drop in mobile users to 39 million, which will push down the penetration rate to 123 per cent, compared with a 16 per cent year-on-year decline in 2017, where the penetration rate reached 127 per cent.

CITC has also implemented new regulations that are expected to dent the income of telecom operators. For example, the removal of a ban on VoIP will reduce income from international calls, which account for around 7 per cent of sector revenue, NCB Capital said.