Lewes, DE -- (SBWIRE) -- 09/02/2016 -- The replacement of Saudi Arabia's heir in April 2015, along with other major changes in the country's leadership, represent a further consolidation of King Salman's authority. That said, the elevation of the king's son to second in line to the throne is proving a controversial choice and could spark future instability. Saudi Arabia's economic growth will slow considerably in 2016 and 2017 after six consecutive years of strong expansion.

The corporate sector will face a much more challenging macroeconomic environment, amidst contractions in public spending, rising energy costs and tightening liquidity. Saudi Arabia's austerity budget for 2016 heralds a prolonged period of economic disruption and increased political headwinds. While the government's economic programme has the potential to significantly overhaul the Saudi economy, resistance from the elite and popular discontent will present substantial roadblocks to reform.

The Saudi-led military operation in Yemen has so far achieved few of its desired objectives. A move towards political dialogue between the warring factions is likely, but any agreement between Saudi Arabia and Yemen's Shi'a Houthi rebels will be difficult to reach and even more difficult to implement. While we maintain that large-scale protests are unlikely to occur in Saudi Arabia, large youth unemployment coupled with a lack of political liberties mean that tensions will continue to linger. The municipal polls conducted in Saudi Arabia in December 2015 are of mostly symbolic importance, given the councils' limited authority. That said, the election of several women marks a positive evolution in the country's slow and highly managed process of social reform, and we expect women to gain further ground in public life and the private arena over the coming years.

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The ruling PAP's landslide victory in 2015's elections, along with a comfortable by-election victory in May 2016, supports our assertion that the party is experiencing a resurgence in popular support. However, we expect it to broadly retain its policy strategy adopted in 2011, as its more consultative approach to governance appears to have paid significant dividends. This entails a continued emphasis on restructuring the labour force away from its dependence on foreigners, as well as strategic investments into productivity-enhancing measures.

Singapore is likely to experience modest real GDP growth through 2017 and we maintain our forecast for real GDP growth to come in at 1.7% in 2016 and 2.2% in 2017. Poor external demand and structural domestic trends will keep headline GDP growth subdued, although we believe that a marked deterioration in the labour market remains unlikely owing to the city-state's solid economic foundation.

Major Forecast Changes
We have revised our end-2016 forecast for the Singapore dollar upwards to SGD1.3700/USD (versus SGD1.4000/USD previously) as a result of a stronger than expected performance so far this year, as well as a lower likelihood of interest rate hikes from the US Federal Reserve in the near future. For 2017, we expect the currency to appreciate modestly to SGD1.3400/USD by year-end.

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Spain's economic outlook will deteriorate over the next two years as strong growth rates in previous quarters prove unsustainable. While we believe that Spain's economy will remain a eurozone growth outperformer over the next two years, we maintain our view that the country's economic recovery has reached its peak. Private consumption, the main growth driver, will moderate in 2016 and 2017, while anaemic eurozone growth will weigh on external demand. We believe fixed investment will take a hit, and our projections show a clear downtrend in gross fixed capital formation's pp contribution to GDP growth over the coming years.

In particular, this will intensify existing weaknesses in the country's construction sector. We see Spain's services sector recording robust growth over the coming years, driven in large part by the domestic tourism industry, which accounted for more than 15% of Spanish GDP in 2014. Following the inconclusive June general election, public pressure to avoid a third election will see the People's Party, Socialists and Citizens come to an agreement of some kind to form a government. The most likely outcome will be either a 'grand coalition' or a PP minority administration.

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The Sri Lankan economy is likely to face multiple headwinds over the near term arising from a volatile agricultural sector, a poor consumer outlook, as well as rising risks of a balance of payments crisis. However, the industrial sector is likely to recover over the coming quarters on the back of a more stable political climate. As such, we forecast Sri Lanka's economy to grow at 5.2% in 2016, marking an improvement in growth from 2015. The Sri Lankan government will have to agree to austerity measures imposed by the IMF under the conditions of a USD1.5bn bailout as the country faces risks of a balance of payments crisis. Under the conditions of the bailout, the government will likely have to reduce its budget deficit to 5.4% of GDP by end-2016. In addition, the Central Bank of Sri Lanka (CBSL) will be forced to raise interest rates and devalue the currency in order to build a foreign reserves buffer. However, we believe that the government will face difficulty in making short-term adjustments to its budget due to political gridlock and high interest costs.

The election of President Maithripala Sirisena in January 2015 and the United National Party's victory in the August general election have been positive for socio-political and economic reforms in Sri Lanka. However, we note that the loose coalition arrangement (which is made up of two parties from opposite ends of the political spectrum) is highly susceptible to political gridlock, and will be a risk to the policymaking process in the country. At the same time, there is also a possibility that the Joint Opposition could gain traction due to defections from the Unity Government. Accordingly, we have dialled back the Short-Tem Political Risk Index Score to 71.5, from 72.3 previously.

Major Forecast Changes
The CBSL will likely pursue further monetary tightening stance in order to slow credit and money supply growth. In addition, higher interest rates are also necessary for the CBSL to build up a foreign reserves buffer (in line with IMF demands). As such, we expect the central bank to hike its benchmark deposit and lending facility rates by 50 basis points to 7.50% and 9.00%, respectively, by the end of 2016.

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