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The big question: Austerity or stimulus?

There seems to be one overriding question in the minds of economists as they look ahead to the Saudi Arabia budget for 2018, due to be published today: Will it be fiscal austerity or economic stimulus for the Kingdom next year?
A lot has happened since the budget of 2015, when the effects of the oil price collapse were at their most damaging and introduced Saudi citizens to the concept of “austerity,” which few had encountered before.
Since then, the Vision 2030 strategy and the National Transformation Plan (NTP) 2020 have been put in place. Government benefits were cut back, though some were ultimately reintroduced.
The sale of a percentage of Saudi Aramco on global stock markets was announced, a transformational event in the Kingdom’s history but only part of a much bigger privatization plan.
And — perhaps most importantly — the oil price began to creep back upward, aided by the control of supply by Saudi Arabia in its new commercial alliance with Russia.
In the past couple of months, the government announced a sweeping anti-corruption campaign that could bring in $100 billion and improve the business climate in the Kingdom. 
Those measures combined have had a positive effect. Saudi Arabia’s fiscal position has continued to improve in 2017, but a slowing in the rate of economic activity and commitment to deficit reduction will limit policymakers’ scope for an expansionary budget for 2018, many economists believe.

There is a consensus that the budget deficit will continue to fall, due to the combined effects of higher oil prices and cost-cutting.

Frank Kane

Finance Minister Mohammed Al-Jadaan said in October that “the budget will be expansionary,” and last week’s announcement of a SR72 billion ($19 billion) private-sector stimulus package again raised hopes of a significant loosening of “austerity” in 2018, especially against the background of a rising oil price. But economists believe any further stimulus could be offset by a government desire to raise revenue and limit its spending. 
“We’ll find out tomorrow if austerity will finally give way to stimulus,” said Ziad Daoud, chief regional economist with Bloomberg.
Jason Tuvey, Middle East economist with London-based Capital Economics, was doubtful that there would be much room for unbridled expansion: “Austerity has been concentrated on spending cuts. In addition, administered prices of fuel, electricity and water have been hiked and the government has introduced a range of new taxes.”
As a result, Saudi Arabia has recorded the sharpest improvement in its underlying budget position in the Gulf. The non-oil budget balance — perhaps the best measure of underlying fiscal positions — has improved by 25 percent of non-oil gross domestic product (GDP).
But Tuvey still thought that hopes of a substantial loosening of fiscal policy were likely to be dashed. Three revenue-raising measures were likely to counter-balance the private sector stimulus and the recent Citizen’s Account policy, a SR40 billion raft of allowances to help the low-paid.
A fresh round of subsidy cuts in fuel, water and electricity; the introduction of value-added tax (VAT) next month; and new fees on expatriate workers are all likely to reduce the overall expansion potential of the budget.
Jean-Michel Saliba, Middle East economist with Bank of America Merrill Lynch, said recently: “If we are correct about the reforms to be introduced in 2018, this suggests that the finance minister’s comments about an expansionary budget may have to be introduced through higher spending. Ideally, this could take place through higher capital expenditure rather than potentially sticky current expenditures.”
The International Monetary Fund (IMF) recently recommended that “a large, sustained, and well-paced fiscal adjustment is needed over the medium term,” but there have been reports that the target date for fiscal break-even will be put back from 2020 to 2030, although no official confirmation has come from Saudi authorities.
There is a consensus that the budget deficit will continue to fall, due to the combined effects of higher oil prices and cost-cutting. “Fiscal data in the first half of 2017 and higher oil revenues have narrowed the fiscal balance,” Saliba said, while Tuvey believes that the overall budget deficit is likely to fall to about 4 percent of the GDP in 2018, compared with an estimated 5.5 percent this year.
Other key elements of the budget include the assumptions on the price of crude oil for the coming year, which will help frame financial calculations. 
Khalid Al-Falih, the energy minister, said at the Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna earlier this month that production cuts — which have helped crude climb back above the $60 mark for the past two months — would stay in place until supply and demand were balanced. He seems comfortable with the prospect of $60 oil.
Observers will also be on the lookout for hints about the progress of the initial public offering (IPO) of Saudi Aramco, but this is not likely to affect the revenue calculations for 2018. If the IPO does get away in 2018, the revenue will probably be counted in next year’s budget.

• Frank Kane is an award-winning business journalist based in Dubai.
Twitter: @frankkanedubai