The fiscal success story of G-20
Unlike all other periods of low oil prices and double-digit budget deficits, Saudi Arabia managed to narrow its 2017 deficit to 8.9 percent of its gross domestic product (GDP) from nearly 13 percent in 2016. Economic reforms are advancing, improvements in the business environment are gaining momentum, and an essential pro-private sector stimulus package is unfolding.
The Saudi economy has adjusted quickly to the impact of low oil prices and fiscal consolidation is taking shape. Non-oil growth is expected to pick up in 2018 and as reforms are implemented, medium-term output prospects will strengthen.
The budget at its core is focused on reinstating growth. It is expansionary in nature while not fiscally constraining over the short to medium term. Saudi Arabia has the fiscal space to allow a more gradual consolidation than envisaged in the original Fiscal Balance Program outlined in late 2016. Hence, its decision now to reach a balanced budget by 2023 is prudent and allows for growth to take center stage. It is expected that the real GDP will surpass the 2 percent mark in 2018 and the ongoing implementation of structural reforms will help accelerate the private sector’s growth.
The deficit was financed through deposit drawdowns and borrowing. The fiscal deficit shrank considerably in 2017 relative to 2016 and 2015. This reflected an increase in oil revenues, but also lower spending and higher non-oil revenues. Government employees’ allowances that were cut in October 2016 were reinstated in April 2017, which helped purchasing power and consumption. The payment of government arrears, the external sovereign bond issuance program, and SAMA policy measures helped ease liquidity pressures in 2017. The PMI, which gauges general business confidence in the economy, has been rebounding in 2017, after hitting lows in 2015.
The future trajectory of oil prices will determine the sustained fiscal adjustment program in the coming years. However, the current situation is vastly different from the late 1990s. The Asian financial crisis led to a sharp reduction in global demand for oil and a large drop in oil prices. Saudi Arabia, together with other members of the Organization of the Petroleum Exporting Countries (OPEC), reduced production in response (in late 1998 and early 1999). Oil revenues fell substantially in 1998, pushing the current account and fiscal balance into, or further into, deficit.
The starting fiscal position was weak — a deficit of around 3 percent of GDP and outstanding debt of around 70 percent of GDP. Today in Saudi Arabia the fiscal position is gaining momentum and strength. Its budget deficit fell to a single digit and that will help the economy sustain a debt within its targeted upper limit of 30 percent to GDP.
Economic reforms are advancing, improvements in the business environment are gaining momentum, and an essential pro-private sector stimulus package is unfolding.
Although economic history does not repeat itself, some periods of rising US interest rates have occurred during times of higher oil prices. US interest rates increased from 6.5 percent in February 1988 to 9.75 percent in February 1989, while oil prices increased. In the second episode, interest rates rose from 3 percent in January 1994 to 6 percent in February 1995. Interest rates are on the rise and it is expected the Fed will implement three rate hikes in 2018. While higher interest rates might appear to be associated with a slowing in deposit and credit growth, the behavior of non-oil growth requires close observation.
Saudi Arabia unveiled a SR72 billion ($19.2 billion) program to boost the private sector’s growth, with money to back housing construction as well as fee waivers for small businesses. The package, part of a four-year, SR200 billion ($53 billion) stimulus program announced last year, comprises 17 individual initiatives that will result in direct and indirect job creation.
The implementation of contra-cyclical responses around the world has been wide in magnitude and composition. The fiscal multiplier depends on certain macroeconomic characteristics, being substantially high, for instance, if individuals’ marginal propensity to consume is high.
Labor market reforms are a key priority for the Kingdom’s economy. More than 1 million Saudis are expected to enter the labor force during the next five years. Policies are being designed to increase the competitiveness of Saudi workers in the private sector as well as to increase the incentives for private businesses to hire Saudi nationals. Female labor force participation has been increasing: The National Transformation Program (NTP) targets an increase in the female participation rate to 28 percent by 2020. Revenue multipliers can be used to offset short-term firm costs.
A fiscally healthy and growing Saudi economy is beneficial not only for the wider region but the world as a whole.
• John Sfakianakis is the director of economic research at the Gulf Research Center (GRC) in Riyadh.
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