Saudi public finance stabilises on oil windfall and structural reforms

Dubai: Saudi Arabia’s government finances are on a strong rebound after going through a period of mounting fiscal deficits that warranted high levels of public borrowings and draw down from government reserves.

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 from 34.3 billion riyals in the first quarter.

Gains in government revenues largely driven by higher oil prices have helped the kingdom to narrow its fiscal deficits from the levels forecast earlier, according to economists.

Total revenues in the second quarter reached 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.

The revenue gains are reflected in significant decline in fiscal deficits. “The fiscal shortfall contracted by 84.2 per cent year on year the second quarter despite strong growth in government spending. The first half 2018 data shows a sharp reduction in the deficit to SAR41.7 billion ($11.1 billion) — down 42.7 per cent year on year from the shortfall SAR72.7 billion realised in the first half of 2017,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank (ADCB).

The new data comes on the back of widening fiscal deficits reported in the first quarter of this year. The kingdom’s fiscal deficit widened in the first quarter of 2018 to $9.2 billion (-5.4 per cent of GDP) from $7 billion (-4.1 per cent of GDP) in the first quarter of 2017. The overall fiscal deficit widened by 31 per cent year on year, despite a healthy 15.4 per cent increase in government revenue in the quarter.

Economists expect along with decline in deficits, the Saudi economy is likely to pick up growth momentum this year. In the first quarter of this year, real GDP grew by 1.2 per cent year on year compared with -1.2 per cent year on year in the fourth quarter of 2017 and a decline in GDP of 0.7 per cent for 2017 as a whole.

“Looking ahead, four years after oil prices began to precipitously fall, we continue to witness signs that Saudi Arabia has begun to structurally adjust to the lower energy earnings environment and we expect growth to gather further pace in the near-term,” said Ehsan Khoman, Head of MENA Research and Strategy, MUFG.

A pick up in economic activity is widely expected in the remainder of this year. “Proxy data point to an acceleration in private consumption from the second quarter with the fading impact of the introduction of VAT and the allowance payments to nationals at the beginning of the year. Moreover, price discounting by corporates is also likely a supporting factor. However, the drop in the expatriate population and the still overall weak consumer confidence is suppressing any recovery of private consumption growth,” said Malik.

Data on the expenditure side continues to highlight a shift in 2018 towards a more expansionary stance after years of spending restraint, according to ADCB’s research team. Total government expenditure rose 33.5 per cent year on year in the second quarter of 018 and 26.5 per cent year on year in the first half of this year.

While the current spending has seen a significant rise of 31.4 per cent in the second quarter largely driven by the allowance package for nationals announced in January 2018 and payments from the Citizens Account to support low and mid-income families, capital expenditures have not picked up.

“We believe that the rise in current expenditure (especially the January handout package that was not budgeted for) has been offset by weaker-than-planned spending on the capital front,” said Thirumalai Nagesh, an economist at ADCB.

Although there are no major government-led capital spending has been announced this year, ADCB data shows the value of project awards increased by 10.4 per cent year on year in the first half of this year, which should provide some support to economic activity in end-2018 and 2019 (given the time lag between awarding a project and implementation). “Overall, we see a contained pick-up in real non-oil activity in 2018 from 2017 driven by higher government spending. However, we expect real non-oil growth to remain weak and the multiplier of government spending to be dampened by fiscal reforms,” said Malik.

Bankruptcy law to drive investment growth

Saudi Arabia will introduce its first comprehensive bankruptcy law on August 18. “This is the latest development of a string of reforms under Vision 2030 to further encourage foreign direct investment (FDI) into the Kingdom by structuring the business legal framework,” said Ehsan Khoman, Head of MENA Research and Strategy, MUFG.

The law is expected to specify provisions related to the liquidation, settlement and financial reorganisation since the current applied legislations are not sufficiently governing the procedural and judicial aspects of these essential matters. In addition, the law will protect creditors’ rights, reduce the costs and time frame of the bankruptcy procedures and encourage SMEs to invest in the commercial market.