Dubai: If you want to know what’s happening to Saudi markets, we need to get a sneak peek into the economy.

On the face of it, the midterm or the first half of 2017 scorecard of Saudi fiscal numbers appear appealing; Saudi deficit narrowed to 73 billion Saudi riyals (-51 per cent YoY) in first half, well within the full-year budgeted fiscal deficit for 2017 (SAR 198b). As a result, the deficit (annualised) stood at 5.6 per cent of GDP, significantly below the projected deficit of 7.6 per cent for 2017. However, a deeper dive into the numbers poses a couple of question marks, and we are wary of a sustained H1 momentum for the rest of the year. To slice and dice, overall revenue increased 29 per cent YoY, driven entirely by higher oil revenue (+63 per cent year on year), underpinned by a global rebound in oil prices (average of $53/bbl in first half of 2017 versus $41/bbl in 1H16). However, oil production declined 3 per cent YoY in 1H17, holding back support to the revenue stream.

Furthermore, the situation was underlined by the sluggish performance of non-oil revenue stream (-12 per cent YoY) and the government is yet to revive spending (-2 per cent YoY versus planned spending growth of 6 per cent in 2017). The silver lining of the midterm fiscal report card is low debt/GDP ratio of Saudi (debt of $91 billion; 60 per cent domestically held), which currently hovers around 13 per cent. We expect the debt/GDP ratio to increase in second half of 2017 due to the recommenced domestic bond issuances (17 billion Saudi riyals in July and 13 billion Saudi riyals in August) and we see a higher probability of these issuances continuing until the end of this year, in a bid to fund the fiscal deficit.

Perhaps Saudi Arabia faces a risk of missing its budgeted oil revenue target for 2017. To be precise, oil revenue should increase 24 per cent in 2H17 (from 1H17 levels) to meet the budgeted target. We opine this to be an overly optimistic scenario, given oil prices are currently trending at broadly similar levels (average of $51/bbl in 3Q17) observed in 1H17, and a noteworthy upside in both oil prices and production from the current levels, is unlikely in our view.

On a relative note, non-oil revenues could shed some good news, although it has to rise around 25 per cent in 2H17 (from 1H17 levels) to meet the full-year budgeted target. The implementation of 100 per cent excise taxes on tobacco and 50 per cent on soft drinks (in mid-June 2017) should boost non-oil revenue in 2H17. That being said, subdued government spending will have a negative impact on the business activity. Recently, we are hearing noises on the ground on spending activity (with projects such as the Makkah Metro line, wind power at Dumat Al Jandal, and Red Sea tourism). However, we believe it is too early for the positive impact of these projects to be reflected in the revenue numbers for this year; hence, these developments are less eventful in our view. Other growth drivers such as domestic consumption (point-of-sale transactions up 13 per cent YoY in July), and PMI (55.7 in July versus 54.3 in June) have shown signs of improvement, nonetheless not drastic enough to accelerate the last 12-month average data. Additionally, the delay in implementing the energy pricing reform program could make the chase to the target, a touch and go!

Interestingly, the IMF has shared similar views as the agency lowered its GDP growth forecast for the second time this year for Saudi Arabia to “close to zero” (0.1 per cent for 2017), partially driven by declining oil GDP. The IMF expects non-oil GDP to grow 1.7 per cent in 2017, led by structural reforms; however, it anticipates oil GDP to fall by 1.9 per cent.

Amid this backdrop, we believe it is crucial for policymakers to keep the score board ticking to end the year satisfactorily. Looking ahead, it remains to be seen if a) there is a notable improvement in the lending parameters of the banks; b) the recent growth in PMI is sustainable; c) the non-oil sector is gathering momentum as anticipated; and d) fiscal reforms are progressing according to the planned agenda. All of these, along with geopolitical stability and supportive oil prices, will be the cue in delivering a positive verdict on the economic performance. Conclusively, we suspect that actual revenues could fall shy of the budgeted projections; nevertheless slower-than-anticipated project spending could help keep the fiscal deficit firmly in check.

(The writer is a vice-president at Shuaa Capital)