DUBAI
Saudi Arabia announced its largest ever budget spending for the year 2018 despite oil price still faring way below the booming year averages, signalling government’s eagerness to boost flagging growth figures.
“After two years of austerity, officials are shifting attention to growth as they believe austerity drive in past two years has battered economic growth. Saudi Arabia announced that the kingdom witnessed contraction of 0.5 per cent in 2017 and has estimated the real gross domestic product growth of 2.7 per cent for 2018,” Muscat-based Ucapital said in a note.
The government has pushed its target of breaking even the budget from 2020 to 2023 and has earmarked to spending over 1 trillion Saudi riyals in the next four years after 2018. The spending is projected to increase from 1 trillion riyals in 2019 to 1.1 trillion riyals in 2022 while revenue has been projected to grow from 843 billion riyals in 2019 to 1.05 trillion riyals in 2022. Hence until 2022, government will continue to run deficit.
A surplus of 4 billion riyals is expected to be posted in the year 2023 with revenue of 1.138 trillion riyals while spending’s of 1.134 billion riyals.
The budgeted revenue of 783 billion riyals for 2018 is higher by 12.5 per cent when compared to the actuals of 2017. During 2017, despite better than expected oil price, the oil revenue was at 440 billion compared to budgeted 480 billion because of reduction in oil output agreed with the Opec members.
Oil revenue is estimated to grow to 492 billion riyals compared to budgeted numbers of 480 billion riyals in 2017. Non-oil revenue has been projected at 291 billion riyals, 37 per cent higher than the budgeted numbers for 2017.
The growth in the non-oil revenue is expected to be supported by the introduction of value added tax (VAT) and also because of the application of the new fee mechanism on the expatriate population. Government projects tax on goods and services to generate 85 billion riyals in 2018.
“We suspect the growth in non-oil revenue to be even higher than the budgeted projection, if the government successfully implements the planned reforms such as introduction of VAT, hike in electricity tariff, increase in selective fuel prices and revised foreign workers/dependents fees,” Shuaa Capital said in a note.
The budgeted expenditure of 978 billion riyals for 2018 is higher by 5.6 per cent when compared to the actuals of 2017. Government in 2017 ended up spending 36 billion riyals more than the budgeted spendings. For 2018 the expenditure will come from three main sources. Expenditure from the budget will reach 978 billion riyals. In addition, 50 billion riyals will be allocated from the development funds under the National Development Fund. Another source of capital and investment spending that will support the economy and development is investment spending within the Kingdom from the Public Investment Fund (PIF) to fund its new and existing projects.
“The 2018 budget is, on balance, expansionary as the pace of austerity eases further thanks to higher oil prices and more gradual fiscal reforms. However, this is coming at the cost of a higher fiscal break even oil price, and volatile oil prices could dent the hard-won credibility of the fiscal reform programme,” said Jean-Michel Saliba, MENA Economist of Bank of America Merrill Lynch.
Economists say fiscal easing could prove premature if oil prices disappoint as higher expenditures drive the fiscal break even oil price higher, and private sector expectations now make changing course more challenging near-term. For now, stable Saudi energy policy and high oil prices support government efforts to lengthen the timeline for fiscal consolidation. The government’s projected medium-term rebound in real hydrocarbon GDP growth likely supports a gradual exit strategy from the Opec+ agreement back to market share focus.
Stimulus impact
Analysts say higher capital expenditures are an undeniable support to the non-hydrocarbon sector activity.
Overall, the budget is in line with expectations. The dependence on oil is reduced, with non-oil contributing more than 37 per cent of total revenues. Also, it is a positive that the kingdom is moving the target year for eliminating its budget deficit to 2023, from 2020. This suggests continued focus on capital expenditure which drives economic growth and is the right strategy for developing economies,” said Vrajesh Bhandari, portfolio manager MENA equities, Al Mal Capital.
Authorities project real GDP growth of 2.7 per cent in 2018 with a robust expansion of 3.7 per cent in the non-hydrocarbon sector.