Dubai: Saudi Arabia’s wide-ranging social, economic and financial sector reforms are bringing about a long-term transformation to the Saudi economy with sustainable improvements in public finance and job creation, according to the latest International Monetary Fund (IMF) Staff Report.

Last week, the IMF concluded the Article IV Consultation with a projection of a real GDP growth 1.9 per cent in 2018, with non-oil growth strengthening to 2.3 per cent. Growth is expected to pick-up further over the medium-term as the reforms take hold and oil output increases.

The fiscal deficit is projected to narrow to 4.6 per cent of GDP in 2018. Higher exported oil, domestic energy, and non-oil revenues more than offset additional capital spending, compensatory payments to households through the citizens’ accounts, and the cost of the January Royal Decree, which introduced monthly allowances for public sector workers, retirees, students, and those on social benefits through the end of 2018 (1.8 per cent of GDP).

The latest data from Saudi Arabia’s Ministry of Finance showed that the kingdom’s budget deficit narrowed to 7.36 billion Saudi riyals (Dh7.19 billion) in the second quarter, down from 34.3 billion riyals in the first quarter. Gains in government revenues largely driven by higher oil prices have helped the kingdom narrow its fiscal deficit from levels forecast earlier, according to economists.

Total revenues in the second quarter came in at 273.6 billion riyals, up 67 per cent from the same period last year. While the non-oil revenues reached 89.4 billion riyals, up 42 per cent year-on-year, oil revenues surged 82 per cent year on year to 184.2 billion riyals.

Deficit growth

IMF staff project that the fiscal deficit will narrow to 1.7 per cent of GDP in 2019, before widening modestly thereafter. The projected decline in the 2019 deficit reflects the assumed expiration of the Royal Decree allowances, containment of spending, higher value-added tax (VAT) collections, and further energy price reforms. Over the medium-term, however, the deficit is projected to widen to 3.6 per cent of GDP in 2023 rather than move to balance as projected in the 2018 budget.

The IMF’s expenditure projections are broadly in line with those of Saudi authorities over the medium-term and assume that savings identified by the Bureau of Spending Rationalisation (BSR) are realised and growth in government employment is contained. The planned further increases in energy prices and the expatriate levy as announced by the government are assumed to be implemented.

The IMF expects the Central Government’s Net Financial Assets (CGNFA) position to deteriorate from 7.7 per cent of GDP in 2017 to minus 11.7 per cent of GDP in 2023. The government is planning sizeable spending/on-lending outside the budget in 2018.

It is transferring 1.7 per cent of GDP from its deposits at SAMA to specialised credit institutions (SCIs) for on lending, and the Public Investment Fund (PIF) is planning to invest up to 2.8 per cent of GDP domestically from its own resources.

Non-oil growth is expected to strengthen to 2.3 per cent this year supported by higher on- and off-budget fiscal spending and higher oil prices, although rising interest rates could act as a drag.

Monthly indicators were weak at the beginning of the year, but are now strengthening. The kingdom’s fiscal deficit widened in the first quarter of 2018 to $9.2 billion (minus 5.4 per cent of GDP) from $7 billion (minus 4.1 per cent of GDP) in the first quarter of 2017.

Credit growth

Money and credit growth are projected to strengthen modestly and inflation to increase in 2018. Higher government spending is expected to positively impact deposits and private sector credit. Bank profitability should increase as interest margins widen, while non-performing loans (NPLs) are likely to increase slightly but remain low.

CPI inflation is forecast to rise to 3 per cent due to VAT and higher energy prices as well as stronger growth, before stabilising at around 2 per cent over the medium-term.

The IMF expects the current account surplus to increase to 9.3 per cent of GDP in 2018. Higher oil revenues are expected to more than offset a recovery in imports.

In the financial account, pension fund and PIF investments overseas are expected to continue, while government external borrowing is projected at $17 billion, and inflows into the equity market are seen picking-up ahead of the inclusion on the FTSE/Russell and MSCI indices in March and June 2019, respectively.

As oil prices soften and import growth continues, the current account surplus narrows over the medium-term.

Financial outflows are assumed to continue at a slower pace, while equity inflows continue in 2019 and 2020 as global investors adjust portfolios

The IMF report recognises that oil prices are a key driver of the external and fiscal outlook and will affect growth through government spending, financial sector liquidity and asset quality, credit availability, and confidence. An escalation of regional geopolitical tensions could boost oil prices, but also hurt confidence.

The IMF believes successful implementation of the reforms could yield larger non-oil growth dividends. Conversely, weak non-oil growth and limited private sector employment opportunities may make further fiscal reforms difficult and result in a larger fiscal deficit. In turn, higher government financing needs could reduce credit availability, undermining private sector growth. Delays in privatisation and the growing role of the PIF may lead to a larger role of the government in the economy, crowding out the private sector.