Saudi Arabia’s decision to reverse allowance cut is likely to boost overall consumption in the economy, as higher disposable income will benefit core consumption sectors i.e. retail and food sectors, a report said.

Notably these were the sectors which saw the steepest fall post announcement of allowance cut in September 2016, added the Saudi Economy Update from Al Rajhi Capital, a leading financial services provider in the kingdom.

Other sectors such as banks, especially the ones exposed to retail segment are also likely to benefit. The reversal of allowance cut also highlights improved confidence in the economy, which is positive for the broader market in general.

The allowance cut was previously announced when Brent was trading below $45/barrel but there is confidence that oil prices now are likely to remain steady at around $50/barrel or improve from hereon, the report noted.

The enabling factors for the reversal seem to be lower than expected deficit (by 50 per cent) in Q1 2017 due to increase in government revenue and reduction of expenses due to rationalization of government expenditure. Note that the kingdom ordered ministries and agencies to review unfinished infrastructure and other projects which led to SR17 billion ($4.5 billion) of savings, the update said.

Further, the Central Bank now expects the trade deficit to possibly move into a surplus in 2017.

Improving confidence in the economy

The reversal of allowance cut is positive for the economy as it points to higher confidence that the government will be able to meet/better the fiscal targets as mentioned in Fiscal Balance programme.

Notably, the total allowances constituted SR80 billion or around 25 per cent of total public salaries and allowances in 2015 while the savings in expenditure has already been 1/4th of the total allowances.

Impact on stocks

The decision is broadly positive for equities and is likely to boost consumption driven sectors such as retail, food etc. Retail, Consumer services, consumer durables, food and staple sectors had seen the steepest fall in the week post the decision to cut allowances (Sept 2016).

“We believe these are the stocks that are likely to benefit from announcement. Even stocks in other sectors such as banking, construction etc. could see a boost due to higher overall confidence in Govt spending while export oriented sectors could also witness an uplift on increased likelihood of progressive subsidy cuts on feedstock being deferred,” Al Rajhi Capital said in the report. – TradeArabia News Service