Breaking old habits
Saudi Arabia continues to grapple with oil dependency and unemployment as it pursues its long-term diversification agenda.
Saudi Arabia’s economy is expected to contract slightly in 2017 before rebounding next year. The Institute of International Finance (IIF) in a recent report expects the Kingdom’s economy to contract 0.4 per cent in 2017 before increasing two per cent in 2018.
The region’s largest economy’s second quarter budget performance report released by its Ministry of Finance revealed that the Kingdom’s budget deficit fell to SAR 72 billion in the first six months of the year, half of the 2016’s deficit in the corresponding period and only 37 per cent of the government’s budgeted full year deficit of SAR 198 billion.
Although the greatly reduced fiscal deficit is credit positive for the sovereign, Moody’s in a review of Saudi’s numbers suggested that the smaller deficit almost entirely reflects a sharp increase in oil revenues from higher oil prices, illustrating Saudi Arabia’s oil dependence. Oil revenue in the first half of 2017 reportedly rose 63 per cent, or SAR 82.1 billion, from the year earlier period, even as OPEC production cuts constrain Saudi Arabia’s crude oil output until March 2018. The increased oil revenue comprised 69 per cent of total government revenue in the first half of this year, up from 55 per cent in first half 2016.
Despite the government’s wide ranging economic and fiscal reforms to reduce its dependence on oil revenue, the results of efforts to grow nonoil revenue have been mixed. Overall, nonoil revenue in the first half of 2017 declined by almost 12 per cent, or SAR 12.7 billion, from a year earlier. Customs revenues dropped SAR 2.9 billion, despite increased duties on hundreds of items in 2017, and likely reflects the continued weak growth of import-dependent nonoil sectors. However, income tax revenue (primarily corporate taxes) increased 23 per cent, or SAR 1.7 billion, over the same period.
Additionally, the unemployment rate for Saudi Arabian nationals has increased to 12.3 per cent and is likely to stay high for several years in the absence of a strong recovery in nonoil growth. According to the IIF, the weakened economic growth was pushing the kingdom’s unemployment higher, necessitating the implementation of structural reforms for optimum education, training and job creation across the country, particularly in the private sector.
Full year fiscal consolidation will remain contingent on oil price stability in the second half of the year, suggested Moody’s, given the modest progress at increasing nonoil revenues. However, even with stable prices and production levels, it may be challenging for the government to achieve its oil revenue target of SAR 480 billion. In addition to the weak performance, the lack of additional major reforms planned ahead of the introduction of value added in 2018, nonoil revenues are expected to be slightly lower than the SAR 212 billion budget target.
As total spending in the first half was only 43 per cent of the budgeted amount, the government is projected to likely to undershoot its spending target, which would put further pressure on non-oil GDP growth.