A fiscal map to keep Kingdom’s growing economy on track
Saudi Arabia has announced another historic budget. The government’s main thrust is to support the economy through the largest expenditure in its economic history. Overall expenditure is expected to grow by 7 percent as the main impetus is to support growth in the economy.
An expected budget deficit of 4.2 percent of gross domestic product (GDP) for 2019 demonstrates a solid improvement of the country’s fiscal map. The budget projects a deficit of SR131 billion ($35 billion). This is a huge contrast to the 17.2 percent deficit in 2017 and 15.6 percent in 2016, which should help keep the economy on track to realize its fiscal balance target through 2023.
This puts Saudi Arabia’s deficit on a manageable trajectory as risks to oil prices are on the downside. Its fiscal adjustment has been exemplary as few oil-exporting economies have managed to adjust successfully — with high double-digit deficits for two consecutive years in the recent past — in such a short period of time.
If oil prices and fiscal restraint are applied, the budget deficit should dip below 4 percent. The management of the deficit will also depend on the amount of social support allowances provided to Saudis over the next few years.
In 2018, the economy grew 2.3 percent in real GDP terms — not far from last year’s 2.6 percent growth forecast — which provides for a solid pickup on the back of a 0.9 percent contraction in 2017. According to the budget statement, the economy will grow (in real terms) 2.6 percent in 2019, which should be spurred by the non-oil private sector.
The private sector’s economic activity could lead growth in 2019 as the oil sector will face some downside risks. Non-oil private sector growth should hover around 1.7 percent as the economy absorbs second-round effects from the implementation of value-added tax (VAT), energy price reform and expatriate fees. The government will continue its focused and effective capital expenditure program, which should also boost private sector growth.
This latest budget deficit puts Saudi Arabia’s deficit on a manageable trajectory as risks to oil prices are on the downside. Its fiscal adjustment has been exemplary as few oil-exporting economies have managed to adjust successfully.
Moreover, private consumption — which has been recovering throughout 2018, in large part due to the reinstatement of public sector allowances in 2017 — should continue its boost as the government announced the continuation of SR40 billion in allowances for 2019.
Capital spending, which is the hallmark for real potential growth, is set to increase 19 percent in 2019 from a budgeted increase of 14 percent in 2018. For the first time, education spending is rightly budgeted to receive the largest allocation in the budget at SR193 billion, albeit dropping by 6 percent from last year.
And for the second year in a row, the Kingdom is expected to reduce its military spending by 12 percent for next year. These are important developments as the economy continues to embark in building its human capital base.
Revenues are estimated to increase by 9 percent to SR975 billion, of which oil is expected to comprise 68 percent of total revenues (versus 63 percent in the budgeted revenues for 2018), and the rest derived from non-oil activities. Revenues from taxes are set to rise by 10 percent, and from VAT by 3 percent next year.
Oil prices are the big unknown for 2019. Worries about global growth and a supply surplus will keep analysts on their toes. Oil traders continue to worry about the vast amount of crude getting pumped in the US thanks to the shale revolution.
However, there is hope that the recent agreement by the Organization of the Petroleum Exporting Countries to cut oil output from the start of next year will provide a lift to prices. In times when oil is trading downward, analysts tend to be more pessimistic, and one can argue that Brent and US West Texas Intermediate (WTI) are oversold.
Contrarians are few and far between now. Some have not discounted for a sharp rebound in the coming months, as the current oil dip can be interpreted as transient and Brent oil can recover to $70-$80 in the next few months. In the event of a revenue shortfall, the country’s healthy balance sheet and its ability to tap into local and international debt markets can provide ample cushioning, for now.
- John Sfakianakis is the chief economist of the Gulf Research Center