SAR1TRN BUDGET TO POWER SAUDI’S ACCELERATED GROWTH

Saudi authorities are benefiting from additional oil revenue, allowing for a loosening of the fiscal stance – and that will come into full play in 2019 when growth accelerates.

After the country’s economy contracted by 0.9% in 2017, the International Monetary Fund (IMF) expects real GDP growth to recover to 1.9% in both 2018 and 2019, reflecting higher oil production and a substantial fiscal stimulus from increased spending.

The new 2019 budget will serve as a catalyst for growth. During an investor conference in Riyadh, crown prince Mohammad Bin Salman revealed that next year’s budget will exceed the SAR 1-trillion mark, noting that salaries accounted for 50% of the budget, a figure that’s expected to decrease to 45% next year.

We believe that the unemployment figures will improve next year until we reach 2030, he said. "The size of the public investment fund, for example, was three years standing at USD 150 billion and this year reached USD 300 billion, he said.

In December, Finance minister Mohammed Al-Jaadan announced that the 2019 budget expenditure is expected to reach SAR 1,106 billion, 7% higher than projected expenses for the current fiscal year, due to higher financing expenses, subsidies, social benefits, other expenses, capital/investment expenses as well, due to the government's efforts to boost economic growth.

Mohammed Al-Jadaan, Minister of Finance said: “the 2019 Budget illustrates the strength and resilience of the Saudi economy, and the continued efforts to improve government performance levels, enhance spending efficiency, adopt the highest standards of transparency and implement comprehensive reforms. Saudi citizens are always the top priority in all government efforts to build a stronger economy and to promote economic and social development in the medium term.

The budget shows total expenditures of SAR 1.106 trillion, an increase of 7.3% over 2018 expected figures. Revenues are also expected to increase by 9.0% to SAR 975 billion. The 2019 budget deficit is estimated to amount SAR 131 billion (4.2% of GDP), which is lower than the expected 2018 deficit of SAR 136 billion (4.6% of GDP).

The government has set a ceiling for public debt as a percentage of GDP at 30%, as announced in the National Transformation Programme 2020 – a low percentage compared to the G-20 countries’ high debt levels.

With authorities stepping up efforts to improve the business environment, private investment is slowly picking up.

Higher oil prices, the peg to the US dollar, large public foreign assets, and low public debt also makes Saudi Arabia less prone to emerging market contagion. The fiscal situation is now also on a firmer footing.

The kingdom has implemented substantial fiscal adjustments in recent years, which focused mostly on cuts to capital expenditure. Higher oil prices, combined with additional non-oil government revenue and cuts in fuel subsidies, should more than offset the 20% increase in government spending and narrow the fiscal deficit from 9.1% of GDP in 2017 to 4.4% of GDP in 2018.

Meanwhile, Saudi inflation also looks set to moderate over the quarters ahead. The implementation of fuel subsidy cuts and the introduction of 5% value-added tax (VAT) at the start of 2018 will continue to put upward pressure on prices in the near term, particularly in the transport, as well as food and beverage sectors.

These industries have seen price growth average a robust 10.4% and 6.2% year on year, respectively, in the January to September period. However, weakness in the housing market will serve to mitigate this pressure to a large extent.

Meanwhile, in 2019 we expect a more pronounced deceleration in price growth as the base effects of subsidy cuts and VAT fall off,” according to Fitch Ratings. “This view is also underpinned by our expectation for the Saudi government to shift away from fiscal consolidation next year, which means that any further subsidy cuts or tax hikes are unlikely to prove substantial or to have a major impact on inflation.

Overall, therefore, we forecast Saudi inflation to average 2.6% y-o-y in 2018 and 2.2% in 2019, up from deflation of 0.9% in 2017.

Deeper structural reforms are needed to strengthen the business climate and improve competitiveness to support diversification and job creation, according to the Institute of International Finance (IIF).

It will be crucial to avoid complacency in the context of the partial recovery in oil prices, the IIF said. The case for widespread fundamental structural reforms remains strong as bureaucratic barriers, lack of transparency, inefficiencies, and an unpredictable business environment still represent major impediments to achieve sustained and balanced growth.