This post has been re-started several times thanks to the fluid and speculative nature of information during the Covid crisis. As cases rise, fall and rise again, major decisions are made, reversed or postponed. Building a clear picture is close to impossible, so we are biting the bullet and posting our thoughts on Saudi and the longer-term view as things stand.
So what do we know for sure? Firstly there is no doubt that the Saudi economy is under pretty severe short term pressure. Their decision in March to ramp up oil production just as demand was about to fall off a cliff remains baffling to us and has driven prices down to damaging levels. Combined with the economic shutdown, energy prices have exacerbated an already widening budget deficit, forcing the government to take some drastic short term measures to plug a $26B hole. On May 10th authorities announced the temporary trebling of the VAT rate from 5% to 15%, whilst simultaneously cutting living allowances. Overall Saudi expects to borrow around $58 billion this year to sustain its economy. It is fortunate that there is high demand for its debt with a recent $7B bond offering being oversubscribed by 6-7 times. Spending will be re-directed to supporting the private sector and countering the effects of the virus both medically and economically. Major tourism and entertainment projects that underpin the Vision 2030 plan are already being asked to make significant cuts and have been instructed to put a freeze on new hires for 6 months or more. One or two of the biggest projects are expected to have their completion timelines pushed out, reducing the shorter term investment demands whilst avoiding the embarrassment of shelving them all together.
Other major setbacks include the possible cancellation of The Hajj pilgrimage for this year which is ordinarily a huge generator of revenue for the country and its hospitality and travel sectors. At the time of publishing, the government has not made a decisive announcement, but according to www.thehajj.travel , a leading source of travel information, it seems unlikely that the annual event will go ahead this year. This will also leave another major hole in finances and adds more financial-support demand to the growing list of impacted sectors.
So is there any positive news for Saudi and prospective investors?
One often overlooked impact of Covid in the Kingdom is the almost total disappearance of external travel. According to figures from 2017, $23B was spent on outbound travel from KSA, with $10B of that being leisure travel. (It's likely those numbers were even higher in 2018 & 2019). The reduction of this huge and continuous outflow from the economy to other parts of the world is already a major objective for the Saudi government. Domestic entertainment and tourism were being pushed hard before the pandemic arrived, with The Saudi Seasons and other festival programs being vigorously supported across the country. Now, with travel looking unlikely for the vast majority of citizens, a significant portion of that travel spend will be spent in the country on retail and permitted entertainment. One major retailer has told us that their stores have been extremely busy over the last couple of weeks following the lifting of the curfew, signaling some strength in demand and a population happy to venture into malls and other centres. As such, businesses with interests in retail and associated services may still find growth in those areas.
A series of major investments over the past 2 months also point to Saudi remaining committed to its strategic objectives despite the current crisis. Purchasing a sizeable stake in events and ticketing giant Live Nation suggests that the live events sector will continue to be supported in the Kingdom and provide opportunities for businesses in that sector. Other recently acquired stakes include Carnival Cruises and Marriott Inc in tourism & hospitality, a key pillar of Vision 2030, and will provide additional means of driving visitor numbers as the major tourism developments come on line. The Public Investment Fund (PIF) has also picked up equity in Facebook and Disney, perhaps as hedges in an increasingly digital and remote world, with both pointing to continued liberalization and options for domestic entertainment. Consequently we still remain bullish on the entertainment and travel sectors and the opportunities for new entrants into the KSA market over the medium to long term.