The next phase of economic reforms planned in Saudi Arabia are likely to be delayed to enable a smooth political succession in the Gulf kingdom, according to Bank of America Merrill Lynch.
In a new research note, the banks MENA economist, Jean-Michel Saliba, said priority will go toward domestic politics in the near terms.
"We expect a relatively smooth political succession despite the unprecedented political change... As such, the next phase of economic reforms is likely to be delayed," he said.
Led by Crown Prince Mohammed bin Salman, who was named heir to the throne in an abrupt move last month, the government is trying to balance a shift away from a reliance on oil with austerity measures to balance the budget. It has also cut oil production as part of an OPEC drive to tackle a global surplus.
Saudi Arabia’s economy shrank by 0.5 percent in the first quarter, illustrating the scale of the challenge facing the country’s new heir as he overhauls an economy.
Saliba added: "Should the start of the Household Allowance program be delayed simultaneously with the next phase of energy pricing reforms, then the net fiscal impact is likely marginal.
"The retroactive application of the reinstatement of the public sector allowances only adds 0.25 percent of GDP to spending. However, the key risk is that it reduces policy-making room to manoeuvre in response to low oil prices."
The research note also said that the Saudi US Dollar peg will hold given sizeable foreign assets, adding that a prolonged period of low oil prices remains a primary risk.
The reforms ushered in by the Fiscal Balance 2020 Program are likely to fundamentally transform the economy's structure and growth model.
The report added that Saudi Arabia Monetary Agency (SAMA) total reserve assets declined by $8.4 billion in April to stand at $500.3 billion.
"This is a large decline and worse than expected," Saliba noted.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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