Saudi Arabia’s fiscal deficit has continued to narrow over 2018, partly as higher oil revenues have more than offset higher current expenditures, said the Bank of America Merrill Lynch (BofAML) in a new report.

The 2018 fiscal deficit stood at SR135 billion (c$36 billion; c4.6 per cent of GDP), narrowing markedly from 2017 levels (SR230 billion; $61.3 billion; 8.9 per cent of GDP). This compares to the 2018 budget target of SR195 billion ($52 billion; 6.6 per cent of GDP). The primary deficit stood at 4 per cent of GDP. Oil revenues reached SR607 billion (68 per cent of total revenues), and were 23.4 per cent higher than budgeted.

Non-oil revenue fiscal reforms broadly on track in 2018

“Non-oil revenues came in line with their budgeted amount. This masks weak non-oil non-tax revenues, which we believe were non-recurrent transfers in 2017. However, this was offset by a better-than-budgeted performance from the introduction of VAT,” said Jean-Michel Saliba, Mena economist at BofAML.

VAT proceeds stood at SR46 billion, SR23 billion and 101.5 per cent year-on-year (yoy) higher the 2018 budget. Authorities also incurred an expense of SR 2 billion in 2018 as a result of commitments introduced by the January 2018 Royal Decree (VAT paid on behalf of citizens using private healthcare, private education or buying a first residence valued at no more than SR850,000).

“We had estimated the cost of VAT rebates on private healthcare and education would cost SR1.7 billion, and VAT rebates on housing could cost SR2.5 billion if fully utilized,” Saliba said.

Other introduced non-oil revenue fiscal reforms also came in line with expectations. Excise taxes stood at SR12 billion, up 44 per cent versus the budget amount due to higher consumption rates. The expat levies stood at SR28 billion, 2.6 per cent higher than budgeted, but SR3.5 billion lower than the targets introduced in the initial Fiscal Balance program.

Proceeds from an improved Zakat collection fully offset lower revenues from taxes on international trades due to a fall in non-exempted product imports and the end of the clearing of all backlogs of inter-GCC transfers.

Authorities suggested that the revenue figure for 2018 included SR50 billion in cash collected in settlements from the government's anti-corruption probe. The breakdown of the budget data does not support the thesis that this on-off revenue was reflected into the 2018 published non-oil fiscal revenue outturns.

“However, the settlements may have been transferred to the central government deposits at SAMA (Saudi Arabian Monetary Authority) and may have been used to capitalize Specialized Credit Institutions (SCIs),” Saliba noted.

Social spending boosts expenditures, but some fiscal discipline elsewhere

The January 2018 Royal Order boosted spending, but authorities appear to have tried to contain spending in other areas. Total spending crossed the SR1 trillion threshold in 2018, standing at SR1,030 billion, 5.3 per cent higher than budgeted. The SR52 billion overspending came on the current spending side, as capital expenditures stood fully in line with budgetary targets (SR205 billion; 19.9 per cent of total). Spending on goods and services dropped by 2.5 per cent versus the budget target on the back of rationalization initiatives.

Major fiscal loosening in 4Q18, as expected

Major fiscal loosening took place in 4Q18, as we expected, and in line with historical precedents and the pre-budget statement. The quarterly fiscal deficit stood at SR87 billion in 4Q18, equivalent to double of the combined deficits recorded over 9m18. This was due to higher spending as it increased by c38 per cent quarter-on-quarter (qoq), and largely on the capital expenditure front. Revenues remained stable, partly as oil revenues are reflected in the budget with a quarter-lag.

No major stimulus spending in 2018

As the subsidy spending of SR11.6 billion includes expenditures on the SR200 billion ($53.3 billion; 7.3 per cent of GDP) Private Sector Stimulus Plan, it does not appear much stimulus spending took place. This is in line with our expectations of no major near-term impact from our estimated SR24 billion tranche of the fiscal stimulus for 2018. Nearly 50 per cent of the stimulus package and c90 per cent of already announced measures appear to represent higher capital allocations to various government funds.

This spending perhaps excludes capital increases to Specialized Credit Institutions (SCIs) which have been consolidated into the National Development Fund (NDF). While the government suggested in the 2018 budget that the NDF would spend SR50 billion, data suggests that the combined outstanding loans from the Agricultural Development Fund (ADF), the Social Development Bank (SDB), the Saudi Industrial Development Fund (SIDF), and the Real Estate Development Fund (REDF) contracted by SR5.6 billion instead.

Expansionary 2019 budget increases exposure to oil

The 2019 budget is expansionary as the pace of austerity eases, spending increases, the Royal Order is rolled over and capital expenditure picks up. We think Government spending is likely to put a floor under non-oil private sector growth, but the impact of recent political uncertainty suggests no major rebound.

“However, support to economic activity is coming at the cost of a more sticky and higher fiscal breakeven oil price. The gradual and sticky move higher in the fiscal breakeven oil price, coupled with the relative erosion of fiscal buffers since 2014, increases the economic vulnerability to a sustained drop in oil prices. As such, volatile oil prices, the sticky expenditure path and recent political uncertainty could dent the credibility of the fiscal reform program going forward, in our view,” Saliba said.

2019 budget relies on higher oil prices to finance higher spending

The 2019 budget targets the deficit to narrow to SR131 billion ($34.9 billion; 4.2 per cent of GDP). Revenues are budgeted at SR975 billion (24.5 per cent higher than the 2018 budget and 8.9 per cent versus 2018 actual). On the other hand, spending is budgeted at SR1,106 billion (13.1 per cent higher than the 2018 budget and 7.4 per cent versus 2018 actual).

Budgeted increase in oil and non-oil revenues appears ambitious

Budget targets on the oil and non-oil revenue sides appear difficult to reach. The increase of revenues versus 2018 realized levels largely stems from higher oil revenues (SR55 billion versus 2018 realized levels) and higher proceeds from expat levies (SR28 billion versus 2018 realized levels).

Oil revenues consistent with oil at $80/bbl and no energy pricing reform

2019 budgeted revenue numbers are consistent on our estimates with an internally budgeted oil price assumption of c$80/bbl and oil production at 10.2 million bpd. Authorities clarified that the budgeted fiscal oil revenues incorporate Saudi Aramco transfers in line with the recent past. This is despite the significant capital to be invested by Saudi Aramco this year in the gas network and in Sabic. Authorities suggested domestic energy prices, other than for quarterly-reviewed domestic gasoline prices, are unlikely to change this year. This removes an avenue to support oil revenues.

Lowering of VAT registration threshold unlikely to add much revenues

The lowering of the VAT taxable base threshold in 2019 is not expected to increase VAT proceeds by much. The 2019 budget incorporates VAT proceeds of SR47 billion, up by just SR1 billion versus 2018 realized outturns. Enterprises with annual taxable or expected sales of SR375,000 are expected to have registered by end-2018 and transfer VAT collected to the General Authority for Zakat and Income, versus SR1 million by end-2017. – TradeArabia News Service