Saudi Arabia’s economic activity has bottomed out as high oil prices are allowing implementation of looser fiscal policy and containing near-term fiscal deterioration, said the Bank of America Merrill Lynch (BofAML) in a new report.

 The government intends to support activity through a more gradual pace of fiscal reforms, introduction of household/cost of living allowances and private sector support programmes and introduction of structural reforms as well as the launch of mega-projects, the report said.

“The latter provides most upside potential to our average growth projections of 2.2-2.5 per cent year-on-year,” BofAML said.

Fiscal reforms now need oil at $60 to safeguard stability

“The oil price threshold at which the macroeconomic adjustment brings imbalances to low mid-single digit levels moves to $60 per barrel (/bbl), from our previous assessment of $50/bbl,” BofAML said in the report.

The revised Fiscal Balance program exposes the budget to volatility in oil prices. Still, there are four ways in which authorities can improve on fiscal dynamics: 1) front-loaded energy pricing reform; 2) privatizations; 3) proceeds from anti-corruption crackdown; and, 4) phasing out of the Royal Order next year.

Equity strategy: Remain positive, outlook gains momentum

BofAML retains its positive view on the Saudi market as it sees strong earnings momentum as well as increasing appetite for Saudi equities amongst global investors.

Its views are based on: (1) attractive valuation, with the Saudi market now trading at a mere 3 per cent premium to GEMs versus a historic premium of more than 30 per cent; (2) improving macro fundamentals; (3) the prospect for accelerating earnings, FCF and dividend growth on the back of reform programs, an expansionary budget and a more pedestrian pace of austerity implementation; and, (4) the potential twin index inclusion events in 2018.

Banks and petchems preferred

“Within the Saudi market, our preference lies with companies offering strong earnings and FCF momentum, attractive valuations and dividend yields,” BofAML said.

“In this regard, our sector preference is tilted towards the banks and petchems, who we see as key beneficiaries from the 2018 budget and revised fiscal balance program. We highlight Al Rajhi & Samba as our top picks amongst the banks, Yansab & SABIC amongst the petchems. Elsewhere, given the inflationary pressures on operating costs (e.g. expat levies, rising utility costs), we are more selective; focusing on names that are least affected by the regulations and that have attractive company specific growth stories.”

Commodities: As good as it gets for Opec

“Opec is succeeding at rebalancing the oil market. Our supply/demand balances reflect a faster-than-expected market tightening due to improving cyclical conditions, cold winter, and Opec compliance. A gradual Opec+ deal exit would keep spot and forward prices in a range with the market in backwardation, and preserve Opec's long-run market share,” BofAML concluded. – TradeArabia News Service