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Saudi reforms look more realistic with higher oil prices

Budget deficit to narrow in 2017 on spending and subsidy cuts

Gulf News

Dubai: Saudi Arabia’s fiscal reforms are looking more realistic and within the reach of the broad targets and schedule set by the government, thanks to recent recovery in oil prices and gradual reforms gaining traction, according to economists.

Growth rebound, higher oil prices and reforms supporting non-oil economy are key Saudi priorities in its plans to cope with the new economic realities.

Structural reforms to attract foreign direct investments and diversification of revenue through investments abroad are also part of the plan. King Salman’s ongoing Asian tour that began on Sunday is aimed at building ties with the world’s fastest growing importers of Saudi oil and promote investment opportunities in the kingdom, including the sale of a stake in the state firm, Saudi Aramco.

“The budget statement and medium-term reform programme imply three Saudi policy priorities: easing near-term austerity, supporting higher oil prices and introducing non-oil revenue reforms,” said Jean-Michel Saliba, an economist at Bank of America Merrill Lynch.

The policy aim of the reform programmes is medium-term fiscal adjustment through a combination of higher oil prices and higher non-oil revenues.

Compliance with targeted production adjustments is expected to allow Opec to make progress towards its goal of inventory normalisation. Although non-OPEC compliance is patchier, analysts expect it to remain at levels acceptable to Saudi Arabia.

Despite the recent improvements in oil prices, the government has sent out a clear message that the medium-term reform drive is set to continue. The publication of the Fiscal Balance Programme 2020 highlights that the reform programme is not derailed or is facing any major fatigue. Higher oil prices clearly allow for a better pacing of reform measures.

 

More subsidy reforms

The authorities are planning the introduction of means-tested cash allowances in the first quarter of 2017, with disbursements from June for a total budget cost this year of SAR 25 billion (Dh24.4 billion) or 1 per cent of GDP.

“This is likely to allow further selective energy subsidy reform in the second half of 2017 including electricity, gasoline and diesel. Excise taxes on tobacco and sugary drinks are likely to be introduced in the second quarter of 2017, and an expat levy will come into force in July 2017,” said Saliba.

Saudi Arabia’s fiscal consolidation efforts have focused on both current and capital expenditures. The government has reduced benefits to public sector employees, is planning to cancel $20 billion worth of projects and introduced a 2.5 per cent tax on land.

“Subsidy reforms in Saudi are producing high fiscal gains compared to other GCC countries because of a higher oil intensity. The 2017 budget envisages a 7.9 per cent year-on-year spending increase to SAR 890 billion with a focus on government service provision and social spending,” said Mathias Angonin an analyst at Moody’s.

The 2017 budget suggests flattish real spending, along with further repayment of government arrears in the first quarter of 2017. We see the budget being consistent with oil prices of $55 a barrel and a fiscal break-even of $98/bbl. Economists expect the 2017 fiscal deficit to narrow on the back of higher oil prices, discipline in spending and non-oil revenue measures.

“We see the 2017 budget deficit at SAR 316 billion (12 per cent of GDP) on the back of higher oil prices ($57 a barrel), compared with a deficit of SAR402 billion in 2016 (16.9 per cent of GDP) and SAR385 billion in 2015,” said Saliba.

Strong spending discipline kept the 2016 fiscal deficit in line with budget targets. However, the repayment of contractor arrears of SAR 80 billion drove the 2016 fiscal deficit wider.

Although structural reforms pave the way for a more competitive non-oil economy, there is uncertainty about the government’s capacity to turn such reforms into rapid fiscal gains.

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