An Abu Dhabi National Oil Company (Adnoc) refinery. Oil prices have been trending lower in the last few weeks due to over-production from Saudi Arabia, Russia and other countries. Image Credit: WAM

Dubai: Higher-than-budgeted-for oil revenues are improving the public finances of Saudi Arabia, with the kingdom’s long-term growth a function of continuing fiscal reforms, labour market reforms and structural reforms, according to economists.

Third-quarter numbers revealed a sharp narrowing of the fiscal deficit, with the trend expected to continue the rest of this year. The 2018 nine-moth data shows the shortfall declining to 49 billion Saudi riyals ($13.1 billion or Dh47.91 billion), down 59.7 per cent year-on-year.

Driving the deficit reduction were improved crude revenues and spending controls implemented in recent years.

“The higher oil prices are allowing the focus of Saudi authorities to shift to growth without a material impact on fiscal balances,” said Jean-Michel Saliba, an economist responsible for Middle East and North Africa (Mena) at Bank of America Merrill Lynch.

“The oil price threshold, at which the planned macroeconomic adjustment brings fiscal imbalances towards low mid-single digits, moves to $60 a barrel (bbl) from our previous assessment of $50 bbl.”

The high oil prices and pre-budget statement suggest fiscal spending is likely to be boosted in the current quarter to shelter domestic activity.

Stable Saudi Arabian Monetary Authority (Sama) foreign currency reserves point to a slowing in capital outflows. However, despite the strong improvement in public finances and external balance this year, analysts have called for caution when it comes to spending.

“While we take considerable comfort that the current era of higher-for-longer oil prices is strengthening Saudi Arabia’s balance sheets and sharply narrowing the fiscal deficit, the cyclical upswing from higher oil receipts will serve as a testament of the kingdom’s commitment to meaningfully alter the structure of its economy,” said Ehsan Khoman, head of Mena Research and Strategy at MUFG.

“The concern is that the pressure to return to oil-driven spending may be difficult to resist in the face of the challenging near term economic growth outlook.”

Spending growth

Economists said beyond the improvement in the budgetary position in the third quarter, the recently announced 2019 pre-budget statement is pragmatic, enhancing the kingdom’s real GDP growth while maintaining the government’s strategy of a focus on fiscal stimulus rather than austerity.

While the fiscal deficit is expected to decline sharply for this year, largely driven by the oil windfall, analysts fear government spending has been expansionary with weak capital spending being offset by higher current spending.

“Notably, expenditure growth has outstripped gains in non-oil revenue in the first nine months of 2018, resulting in a widening in the non-oil fiscal deficit. We estimate that the headline fiscal deficit will narrow to about 4.9 per cent of GDP in 2018, down from 12.9 per cent in 2016 and 9.3 per cent in 2017,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB).

According to the medium-term fiscal and economic projections presented in the pre-budget statement, government spending is expected to remain expansionary while expenditure growth decelerates in 2019 and 2020.

“The projections suggest that government expenditure growth is expected to decelerate in the coming years to 7.4 per cent in 2019 and just 3.3 per cent in 2020 [from an estimated 11 per cent rise in 2018]. We believe that this deceleration in expenditure reflects the government’s objective of narrowing the fiscal shortfall,” said Thirumalai Nagesh, an economist at ADCB.

“However, we see a risk of the government having to continue its strong spending to support job creation.”

While analysts agree that economic growth has bottomed out at the expense of looser fiscal policy, they say the government will continue to support economic activity through a gradual pace of fiscal reforms underpinned by the introduction of household/cost of living allowances and private sector support, as well as the introduction of structural reforms and mega-projects.

Revenue risks

The direction of oil prices will continue to remain a major factor in not only government spending, but the balancing of budgets and further economic reforms.

The pre-budget statement indicates growth in both revenue and expenditure estimates from the Fiscal Balance Programme (FBP) released at end-2017. The pre-budget statement pencils in about 100 billion riyals in extra spending in 2019 from the FBP alongside a 135 billion riyal rise in government revenue.

While the pre-budget did not provide a breakdown of government revenues, it likely implies a rise in oil revenue — on the back of higher prices and production — over the outlook period, which will be accompanied by a more gradual pace of fiscal consolidation.

Revenue forecasts for 2019-2021 would require a Brent crude oil price of about $69-74 a barrel with Saudi oil production of around 10.5 million barrels per day (bpd). This is up from an oil estimate of some $60 a barrel with production at 10.2 million bpd for the revised 2018 expenditure projections.

While the new official projections show the targeted budget deficit narrowing in 2019, there are no changes to the 2020 and 2021 numbers. Analysts see the fiscal deficit widening in 2019 with spending remaining expansionary and government revenue down with a fall in oil income.