KSA 2018 fiscal policy is loosening
Saudi Arabia’s 2017 fiscal deficit was higher than expected at 8.9 per cent, 1.1ppt higher than budgeted and 2.5ppt higher than the run rate for the first 9M, due to distribution of government bonuses that were previously reinstated and increased project spend.
Budget deficit in 2017 reached 8.9 per cent of GDP, halving vs. FY 16.
The deficit improved significantly vs. the 17.2 per cent recorded in 2016, but slightly overshot the budgeted 7.8 per cent, IMF’s forecast of 8.6 per cent and the 9 month run-rate of 6.4 per cent, but the non-oil deficit remained mostly unchanged at 26.3 per cent of total GDP in 2017. Total spend came in at SAR 926billion, 4.0 per cent ahead of budget and 8.2 per cent higher than IMF’s forecasts on retroactive disbursement of employee compensation and bonuses, as well as ensuring that contractors are paid within 60 days in Q4. Revenues were in-line with the budget, but exceeded IMF expectations by 9.3 per cent. The numbers suggest that both revenues and expenditure strongly picked up in Q4 with revenues up by 73 per cent q/q and spending up by 85.7 per cent q/q, as 9M spending stood at 64 per cent of the budgeted total for FY 17e. Oil revenues were 8 per cent below the budget due to the delay in the implementation of subsidy reforms (Exhibit 3).
Higher revenues (+12.5 per cent) on taxes and oil at $ 55/bbl in FY 18e.
Both oil and non-oil revenues are expected to increase next year with the government pencilling in a 13.7 per cent increase in non-oil revenues, and 11.8 per cent in oil, bringing non-oil revenues as per cent of the total revenues to 37.2 per cent (+40bps). The increase in non-oil revenues mostly comes from higher taxes, most notably the VAT from January with tax on goods and services expected to account for SAR 85 billion, equivalent to 29.2 per cent of total non-oil revenues (3.2 per cent of GDP), up 81 per cent y/y. Other avenues that the government will use to increase non-oil revenues include the expatriate levy and excise duty on harmful goods, though there is no mention of plans to implement a luxury goods tax. In terms of oil revenues, the government is pencilling in an 11.8 per cent increase to SAR 492 billion assuming a steady state oil price of $55/bbl, in-line with the average for 2017. However, should oil prices hold at $64/bbl, we would expect the 2018 deficit to improve to 2.7 per cent from 7.3 per cent.
Total 2018 spending to increase by at least 5.6 per cent and CapEx by 13.9 per cent.
CapEx spend is expected to increase by 13.9 per cent to SAR 205 billion and to make up 21.0 per cent of total spend vs. 19.4 per cent in 2017, while current spending is expected to increase by only 3.6 per cent with the bulk of the increase coming from social benefits due to the citizen allowance programme, improving the mix. In addition, the Crown Prince mentioned in a separate statement that total spend can even exceed SAR 1.1tn after incorporating another SAR 50 billion from Development Funds and SAR 83 billion from PIF’s new and existing projects.
2018 deficit expected at 7.3 per cent and balanced budget plans now pushed out to 2023.
We welcome the decision to push out its balanced budget plans to 2023 from 2020 given the Kingdom’s comfortable fiscal buffers and following the IMF’s recommendation not to stifle economic growth. The government is committed to keeping debt/GDP below 30 per cent over the fiscal balance period, while government reserves will be kept above SAR 250 billion (vs. SAR 580 billion currently). Real non-oil GDP growth amounted to 1.5 per cent, better than we had expected (1.1 per cent), but we continue to see downside risk with respect to government projections, with non-oil GDP growth expected of 3.7 per cent (vs. ACe at 1.7 per cent).