Saudi Arabia can achieve budget surplus by 2019: Report

Higher non-oil revenue and cumulative cost savings from energy and utility price reforms are the key drivers for balancing the budget. (Reuters)
Updated 13 March 2017
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Saudi Arabia can achieve budget surplus by 2019: Report

JEDDAH: If all the reforms outlined in the fiscal balance program are implemented within the set timeline, Saudi Arabia could achieve a budget surplus by 2019, said a report issued by Al-Rajhi Capital.

The fiscal balance program, unveiled after the announcement of the 2017 budget, comprises rationalizing government expenditure, cost savings from energy and water-price reform partially offset by household allowance pay-outs, new non-oil revenue sources and enabling private sector growth.
Analysts at Al-Rajhi Capital said the government has identified value-added tax (VAT), an expat levy, a municipal fee, an excise tax on harmful products and luxury tariffs as major avenues for generating non-oil revenue. In the conservative scenario (assuming lower oil prices, execution delays in water/energy price reforms etc.), the budget surplus will be achieved by 2020, they added.
According to the economists, higher non-oil revenue and cumulative cost savings from energy and utility price reforms are the key drivers for balancing the budget. They said that apart from creating a new revenue stream for the government, the expat levy will also likely reduce labor arbitrage by narrowing the wage differential between nationals and expats, thereby encouraging companies in the private sector to adopt more value-added and skill-based models given the potential cost pressures.
“We estimate the total employee levy to be 1.4 percent of the establishments’ aggregate revenue (considering the peak levy applicable by 2020), while varying 0-4 percent of revenue for various sectors,” said analysts at Al-Rajhi Capital.
Higher non-oil revenue, as per the report, is premised on the expat levy (to be implemented in July 2017), VAT (to be implemented in early 2018) and other fees such as higher visa fees, municipality and rural fees, excise tax on harmful products and luxury tariffs.
Analysts said the expat levy is likely to be a key contributor to non-oil revenue growth, accounting for 45 to 50 percent of the incremental non-oil revenue in 2020.
“Our incremental non-oil revenue estimate does not include potential receipts from the proposed white land tax,” they said.
While higher non-oil revenue is expected to contribute SR152 billion ($40 billion) incremental revenue by 2020, the cumulative cost savings from energy and utility price reforms are expected to yield SR209 billion ($56 billion) by 2020.
The cost-savings program will be majorly driven by energy- and water-price reforms. According to the fiscal balance program, Saudi Arabia’s energy benefits reached close to SR300 billion ($80 billion) in 2015, given the oil export price at that time.
Furthermore, energy and water benefits have typically accounted for the vast majority of the overall subsidies in the Kingdom.
The first phase of the program was already rolled out in 2016, when electricity and fuel price increases took effect.
However, water price increases have been kept on hold until the metering and billing infrastructure is in place.


Another surprise fall in UK inflation muddies Bank of England rates message

Updated 3 min 56 sec ago
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Another surprise fall in UK inflation muddies Bank of England rates message

LONDON: British inflation fell unexpectedly in April, according to figures on Wednesday that added to doubts about when the Bank of England will raise interest rates again and pushed sterling to its lowest level against the dollar this year.
Consumer price inflation cooled to 2.4 percent last month, its weakest increase since March 2017, and down from 2.5 percent this March.
The figure was below economists’ average expectation in a Reuters poll for it to hold steady at 2.5 percent and represented the second surprise fall in a row after a drop in March’s figures. “It’s a conundrum for the Bank of England which has struggled to read the direction of price changes recently,” Ed Monk, associate director for personal investing at fund manager Fidelity International, said.
“With inflation trending lower, it only makes it harder for the Bank of England to raise rates.” Investors were now pricing in a one-in-three chance of a BoE rate hike in August — the next time it updates its forecasts on the economy — down from 50/50 before Tuesday’s data.
High inflation, caused by the pound’s drop after the 2016 Brexit vote, squeezed British consumers through last year, and although it has receded from its December peak of 3.1 percent, the BoE is keeping a close eye on price pressures.
PIPELINE PRESSURE
Wednesday’s data pointed to some signs of inflation pressure still in the pipeline. Prices of goods leaving British factories increased at a faster rate than expected last month. And while consumer price inflation cooled again, the timing of the Easter holidays and their impact on air fare prices was a big contributor.
On Tuesday Bank of England Governor Mark Carney cited a new sugar tax on soft drinks, as well as higher utility bills and petrol prices, as reasons why inflation “probably tips up a bit” in the coming months before resuming a decline. The ONS said soft drink prices increased sharply over the last couple of months but the overall impact on inflation was minimal.
The latest data on prices in British factories, which eventually feed through onto the high street, were stronger than anticipated. Manufacturers increased the prices they charged by 2.7 percent year-on-year, matching March’s increase. Economists had expected a fall to 2.3 percent. Among manufacturers, the cost of raw materials — many of them imported such as oil — was 5.3 percent higher than in April 2017, up sharply from an increase of 4.4 percent in March and suggesting a long run of weakening price growth has ended.
A surprise drop in consumer price inflation in March, along weak economic growth figures for early 2018, had called into question whether the BoE would raise interest rates more than once before the end of the year.
Earlier this month it refrained from an interest rate hike that had at one point been widely expected. The BoE’s latest forecasts show inflation dropping to 2.1 percent in a year’s time, and returning to its 2.0 percent target a year later — but only if interest rates rise by 25 basis points about three times over three years.
The latest Reuters poll of economists suggests the BoE is most likely to raise interest rates at its August meeting.