This post is part of an AGSIW series on Saudi Vision 2030, a sweeping set of programs and reforms adopted by the Saudi government to be implemented by 2030.

Market Watch Blog AGSIW | Karen E. Young | May 10, 2016

It’s going to be a long, hot summer, full of anticipation. As the frenzy of ministry reshuffles announced on May 7 in Saudi Arabia surprised both domestic and international markets, there is a cautious attitude of “wait and see” prevailing in the private sector. Each week seems to bring new announcements in the Western media of Deputy Crown Prince Mohammed bin Salman’s plans to transform the Saudi economy. This weekend, it was the announcement of new ministers and a rearrangement of ministries, including that Khalid al-Falih will replace veteran oil minister Ali al-Naimi. Falih is chairman of Aramco and previously served as CEO of the company. He additionally served as health minister, appointed in an earlier shake-up in April 2015. Falih’s appointment has been expected in many circles, since his promotion to Aramco chairman in 2015. Also important are moves to separate the water and electricity ministry, moving electricity under the new rubric of Ministry of Energy, Industry and Mineral Resources. SAMA, the Saudi Arabian Monetary Authority, has new leadership under Ahmed al-Kholifey, formerly the executive director for Saudi Arabia at the International Monetary Fund. SAMA has been streamlined with a slimmed down portfolio as its sovereign wealth fund management will be moved to the Public Investment Fund. Interestingly, the PIF will also host a major financial center, as new owner and presumed developer of the King Abdullah Financial District.

For bankers, business executives, and even leaders of government sovereign wealth funds and market regulators, there is a sense of anticipation and nervousness. The summer is expected to be long as Ramadan falls in June and schools will not reopen until after the Eid al-Adha holiday in mid-September. As the National Transformation Plan is expected to begin to roll out in a gradual release in June, there will continue to be shake-ups to government ministries and investments. That means that private sector decisions on business mergers, expansions, and new investments in capital and staff are largely on hold. Added to that is a sense of anxiety over a freeze in government construction projects that is slowly creating ripple effects in the contracting sector. The troubles of the Bin Laden Group are well known, as the freeze on government contracts dates back to the crane disaster in Mecca in late 2015. Yet a number of other, many smaller, contractors are grappling with the government slowdown in awarding projects and payments, and a general market malaise.

In specific terms, there are signs of unsettled markets in the Saudi bank sector. Private bank deposits declined from December 2015 to March 2016 by about $11 billion, according to analysts at HSBC. March deposits began to rebound, however, following a major reduction (about $10 billion) in government deposits to the central bank between December 2015 and March 2016. The Saudi government faces a significant, and relatively new, budget deficit, as much as $88 billion for 2016, according to HSBC Global Research. This deficit will be financed through sovereign debt, both in international and local markets in bonds and loans, potentially raising Saudi Arabia’s debt to gross domestic product ratio from 6 percent in 2015 to 21 percent in 2017.

While the government has successfully been able to seek external finance, there is some concern that the private sector will be under increasing strain to meet its financing needs. The government eased restrictions on lending to encourage liquidity earlier this year. The first quarter of 2016 has seen loan growth at 10 percent from the previous year, mostly in short-term loans. What this means is that businesses are seeking to cover short-term expenses, likely payroll and equipment costs, to meet their “working capital” needs. While increased credit activity is generally good for banks, if there is not a subsequent activation in the private sector to generate revenue to repay these loans, there could be signs of trouble for the local private corporates and bank sector. IMF projections for growth have been lowered across the Gulf Cooperation Council, and down to 1.2 percent for Saudi Arabia in 2016. Loan-to-deposit ratios in Saudi Arabia’s private bank sector are climbing, at roughly 87 percent in March 2016, compared to 79 percent in March 2014, according to HSBC research.

Against this backdrop, there is an uneasy blend of cautious optimism and anxiety surrounding the National Transformation Plan and its ability to spur job growth and economic activity. The longer the wait, the more difficult the environment becomes. Talk of a triple initial public offering, for shares of Saudi Aramco to go on sale in London, New York, and Riyadh have animated markets this week, but the execution of such a transaction is time consuming and also costly to the government (though, of course, the gains could be tremendous netting the government an easy $100 to $150 billion in just a 5 percent sale of the company.) Mohammed bin Salman is known for his quick decisions, but this is an area in which a balance of clarity and stability for domestic markets will help normalize business activity and plans for future growth. It appears that the release of the National Transformation Plan will be spread out over the summer, starting in June, and markets and business people will need to bide time to let the announced changes take hold. The waiting for reforms will take its own toll on economic growth; however, these types of changes to government institutions and state assets will require patience. The question remains how businesses will weather the heat.

This article was originally published by the Arab Gulf States Institute in Washington (AGSIW)

Dr Karen E Young is a former senior resident scholar at the AGSIW. She is a resident scholar at the American Enterprise Institute in Washington and a senior advisor at Castlereagh Associates.