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This document is a page from a Merrill Lynch financial research report dated June 30, 2016 (GEMs Paper #26). It analyzes the fiscal consolidation strategy in Saudi Arabia, specifically focusing on the rationalization of water and electricity subsidies, price hikes in energy, and the potential impact of VAT. It specifically highlights the impact of subsidies on the company Almarai, noting that government subsidies accounted for 15% of its 2015 net income. The document bears a 'HOUSE_OVERSIGHT' Bates stamp, indicating it was part of a document production for a congressional investigation, though the content is purely economic analysis.
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December 2015
Introduction of sweeping energy, water, and electricity administered price changes.
Saudi Arabia
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Almarai continues to receive subsidies from the Saudi government
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Rationalization of subsidies for water and electricity
The sweeping energy, water and electricity administered price changes introduced in December 2015 are a first step in the five-year fiscal consolidation and economic transformation strategy. We expect further reviews of energy, water, and electricity prices over the medium-term. Furthermore, the likely government review of current levels of fees and fines, introduction of new fees, application of a VAT and introduction of excise taxes on tobacco and soft drinks will also impact the Saudi consumer.
The sweeping energy, water and electricity administered price changes introduced in December 2015 are a first step in the five-year fiscal consolidation and economic transformation strategy. We expect further reviews of energy, water, and electricity prices over the medium-term. Furthermore, the likely government review of current levels of fees and fines, introduction of new fees, application of a VAT and introduction of excise taxes on tobacco and soft drinks will also impact the Saudi consumer.
Subsidy cuts on energy and utilities to add up to 1.5ppt to CPI inflation only
We estimate the December natural gas price hike on petrochemical firms, domestic crude oil price hike as well as the combined gasoline and diesel price hike introduced could add US$2.2bn, US$2.0bn and US$3.8bn to central government revenues if fully passed to the budget (a combined 1.2% of GDP). We estimate the direct impact of these higher gasoline, water and electricity prices to add 1.3-1.5ppt to CPI inflation due to their low basket weights (c.1.5%, c0.4% and 1.6% respectively). We think a 5% VAT tax could add c2% of 2015 GDP in fiscal revenues over the medium-term.
We estimate the December natural gas price hike on petrochemical firms, domestic crude oil price hike as well as the combined gasoline and diesel price hike introduced could add US$2.2bn, US$2.0bn and US$3.8bn to central government revenues if fully passed to the budget (a combined 1.2% of GDP). We estimate the direct impact of these higher gasoline, water and electricity prices to add 1.3-1.5ppt to CPI inflation due to their low basket weights (c.1.5%, c0.4% and 1.6% respectively). We think a 5% VAT tax could add c2% of 2015 GDP in fiscal revenues over the medium-term.
Chart 58: Consumer Price Index (CPI) basket– consumer expenditure breakdown
[Pie Chart Legend and Data]
■ Food and non-alcoholic beverages 21.70%
■ Tobacco 0.47%
■ Clothing and footwear 8.40%
■ Housing, water, electricity, gas, and other fuels 20.45%
■ Furnishings, household equipment & routine household maintenance 9.09%
■ Health 2.56%
■ Transport 10.44%
■ Communication 8.10%
■ Recreation and culture 3.50%
■ Education 2.69%
■ Restaurants and hotels 5.75% [Note: Visual correlation suggests 6.83% belongs here or vice versa with the adjacent slice, text says 6.83% near the slice]
[Pie Chart Legend and Data]
■ Food and non-alcoholic beverages 21.70%
■ Tobacco 0.47%
■ Clothing and footwear 8.40%
■ Housing, water, electricity, gas, and other fuels 20.45%
■ Furnishings, household equipment & routine household maintenance 9.09%
■ Health 2.56%
■ Transport 10.44%
■ Communication 8.10%
■ Recreation and culture 3.50%
■ Education 2.69%
■ Restaurants and hotels 5.75% [Note: Visual correlation suggests 6.83% belongs here or vice versa with the adjacent slice, text says 6.83% near the slice]
Source: Haver, BofA Merrill Lynch Global Research
Subsidies account for 15% of Almarai’s net income; 40% are related to poultry
Almarai continues to receive subsidies from the Saudi government, amounting to SAR295mn in 2015. This represents 15% of the Almarai’s 2015 net income. The government pays subsidies based on price of subsidized feed importer, which means it may increase or decrease naturally. Regarding the breakdown by business (poultry, dairy), it is unfixed, depending on the price of feed and ingredients. As of 2015, subsidies for poultry accounted for 40% and dairy for 60%.
Almarai continues to receive subsidies from the Saudi government, amounting to SAR295mn in 2015. This represents 15% of the Almarai’s 2015 net income. The government pays subsidies based on price of subsidized feed importer, which means it may increase or decrease naturally. Regarding the breakdown by business (poultry, dairy), it is unfixed, depending on the price of feed and ingredients. As of 2015, subsidies for poultry accounted for 40% and dairy for 60%.
60 GEMs Paper #26 | 30 June 2016
Merrill Lynch
HOUSE_OVERSIGHT_016170
Merrill Lynch
HOUSE_OVERSIGHT_016170
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