Dubai: Saudi Arabia’s fiscal debt widened from $7 billion (Dh25.6 billion) in the first quarter of 2017 to $9.2 billion in the first quarter of 2018, according to a report from Mitsubishi UFJ Financial Group (MUFG).
Report author Ehsan Khoman, MUFG’s Head of Research and Strategist for Mena, said public sector payouts more than offset the increase in revenue from VAT and other administrative levies.
“Whilst these quarterly fiscal figures highlights the challenges the Kingdom faces in consolidating its finances and delivering on productive and efficient public spending, we take comfort from the authorities focus in sticking to the Budget 2018 path of provisioning an expansionary fiscal policy, reflecting the willingness to support economic growth,” Khoman noted in the report, distributed on Friday.
“With the recent surge in oil prices not yet fully reflected in the fiscal results (expectations are higher oil prices that they will be reflected in the second quarter of 2018 data) suggests that the shortfall is likely to narrow for the reminder of the year.”
Payouts included an additional monthly allowance of 1,000 Saudi riyals to state employees, retirees and military personnel, announced by King Salman in January and intended to offset the costs of VAT and the reduction of fuel subsidies.
“The authorities have also budgeted $8 billion (1.1 per cent of GDP) for payments to lower income households under the Citizens Account to soften the impact of news taxes and fuel/electricity price hikes,” the report noted.
“The rise in expenditures exceeded nonhydrocarbon revenues in the first quarter by 0.4 per cent of GDP, but we believe that any positive impact on growth from this would have been hit by subsidy cuts including fuel and electricity price increases.”
Quarterly government revenues rose by 15.4 per cent year on year to $44.5 billion, largely as a result of non-oil revenues — primarily the introduction of VAT.
Budget gap
The trivial rise in oil revenues (despite the sharp rise in oil prices) came due to a shift to quarterly dividends from Saudi Aramco [instead of monthly earnings prior],” the report notes. “The authorities have indicated that the recent jump in oil prices will be largely reflected in the fiscal data in the second quarter of 2018.”
But MUFG expect the budget gap to narrow during the course of 2018 due it its new emphasis on economic stimulus rather than deficit reduction, and say Saudi Arabia remains well-positioned to withstand lower oil prices, with a fiscal break even point of $74.40 per barrel.
“Saudi Arabia has accumulated sizeable buffers over the years [government banking deposits ($77.0 billion], foreign reserves [$487.9 billion], and ample sovereign wealth fund assets [$223.9 billion],” Khoman noted.
“In addition, with debt levels remaining low (public debt to GDP at 17.0 per cent), along with the sovereigns favourable credit rating profile [S&P: A-; Moody’s: A1; Fitch: A+], it is easy for the sovereign to continue raising debt from international markets at favourable interest rates.”
The report concluded by saying that Saudi Arabia was moving towards meaningful structural chance under the leadership of Crown Prince Mohammad Bin Salman, but warned that diversification would be slow, and it would take years to deliver the pledges of Saudi Arabia’s Vision 2030.
“Also, whilst the ambition is evident, the biggest challenges will be implementation but it is clear that unlike in previous reform cycles during periods of low oil prices, this time appears different and the authorities have shown a stronger willingness to adjust policies in line with changing oil market dynamics.”
Reforms, the report noted, were likely to have profound consequences on the nature of Saudi Arabia’s social contract and societal relations.
