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Abu Dhabi, UAEMonday 18 June 2018

Exclusive: Subsidies removal key to Saudi state firms' viable privatisation

S&P chief says kingdom's public sector must reverse reliance on government spending

Riyadh Metro King Abdullah Financial District Station. Saudi Arabia must remove subsidies from state firms to successfully prepare them for privatisation, agency says.
Riyadh Metro King Abdullah Financial District Station. Saudi Arabia must remove subsidies from state firms to successfully prepare them for privatisation, agency says.

Saudi Arabia, the biggest Arab economy, will have to remove the burden of subsidies from some of the state-owned companies and turn them into commercially viable entities before it could consider privatising them, the head of S&P Global Ratings in the kingdom said.

“The situation now is that the whole public sector is heavily dependent on government [spending]. They are offering their services to the final consumer with [government] subsidies. You can’t privatise these companies unless you take the subsidy out,” Meshari Al Khaled, the managing director of the rating agency in Saudi Arabia told The National in Riyadh. “Only then they become commercially viable”, he said of state firms including some of the utilities and transportation sector companies.

The privatisation drive is likely to be a medium-term project, which will be executed in phases.

“First of all, they need to remove the subsidies and in order to remove the subsidies they have to compensate the low-income families,” Mr Khaled said, adding that compensation is tied to the operations of a national account created by the government to help the low-income segment.

It will still take two to three years after the subsidy reforms before the government could list state assets for privatisation after overhauling them into commercial companies, according Mr Al Khaled. “This can’t be immediate because the impact could be negative.”

Privatisation is one of the main pillars of the kingdom’s Vision 2030, the overarching reform agenda, which also includes expanding the domestic industrial base, reducing the public wage bill and increasing foreign direct investment.

The kingdom, Opec’s biggest oil producer, still relies on hydrocarbons for more than 90 per cent of its revenues while it aims to narrow its budget gap in the wake of persistently low oil prices. Riyadh, which last year removed some of the government subsidies is now considering to slow down the pace of subsidies reform as the IMF urged the kingdom to reduce the pace of its fiscal consolidation to avoid crimping growth.

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The Saudi finance minister Mohammed Al Jadaan told Bloomberg this month that the kingdom may cut energy subsidies more gradually and take longer to balance its budget. The government, which cut perks of government sector employees in 2016, in July this year reversed the decision and reinstated allowances of the public sector employees.

However, Mr Al Khaled said S&P, the first international rating agency to receive a full Saudi Capital Market Authority licence, was happy with the pace of economic reforms and is “actually trying to catch up with it”.

S&P expects the government of Saudi Arabia and corporate sector to continue tapping debt capital markets to shore up their finances. It is unlikely, though, that the government will approach the bond market with a new issue this year as the it prepares to announce the annual budget in about two months’ time, he added.

Only 15 per cent of the companies listed on the Saudi Stock Exchange, the region’s biggest bourse by market capitalisation, are rated and S&P is targeting the remaining 85 per cent to rate, along with the firms listed on the Tadawul’s Nomu trading platform.

The agency is also in talks with large Saudi family offices, offering them confidential ratings, Mr Al Khaled said.

“They would go for it and they will look for a rating definitely if they want to tap debt capital markets,” he said.

“This will open the door for them.”