Higher oil prices could create uncertainty for Saudi reforms: BofAML

The recent uptick in oil prices could support Saudi Arabia’s efforts to lengthen the timeline for its ongoing fiscal consolidation, but casts uncertainty on the pace of the Kingdom’s reforms going forward, Bank of America Merrill Lynch (BofAML) said in a report on Thursday.

“Key will be the 2018 budget to be released in late December; we see modest loosening but acknowledge risks to this view,” BofAML said.

Saudi Arabia’s recent corruption purge, in which dozens of royal family members and high-ranking officials and businessmen were detained, may dampen near-term sentiment but will likely provide further impetus to ensuring success of the country’s reforms.

While structural reforms could boost growth in the medium-term, fiscal reforms have weakened the cyclical outlook, BofAML said.

The Saudi government plans to support activity through easing the pace of fiscal reforms; introducing household allowances and private sector support programs; rolling out structural reforms such as allowing women to drive; and launching infrastructure projects led by the Public Investment Fund (PIF).

In terms of its equity strategy, BofAML said it retains its positive view on the Saudi market, given its attractive valuation, improving fundamentals, better prospects for the non-oil economy on the back of reform programs, and the potential inclusion on MSCI and FTSE emerging market indices next year.

“Given the emergence of a number of risks, we believe appetite for the Saudi market could be tempered in the near-term. These include heightened geopolitical risks and lack of clarity on the pace of reform. As such, we view it unlikely that the market would outperform peers until greater comfort is obtained on these issues, which could emerge with the 2018 budget in Q4 2017,” the lender said.