Causes of concerns among observers:
The recent numbers unveiled by the Saudi Ministry of Finance have raised some concerns among international observers. The famed Lebanese-American essayist Nassim Nicholas Taleb has even gone so far as saying that the Kingdom could face bankruptcy. Although this statement is misrepresenting reality, it is true that there are causes of concerns surrounding the Saudi budget and the government’s goal of attaining fiscal sustainability.
Saudi Arabia is entering its sixth year with a budget deficit. What worries observers is the bullish character of the budget, which plans a 7% increase in spending and an oil barrel worth $80. The problem is that oil prices are currently 40% below that level, and the planned budget deficit of $35 billion in 2019 risks going as far as $78 billion if they remain as low as they are now, around $56 per Brent crude barrel. Although the government’s estimate for the oil price might reflect optimism that the 1.2 million bpd cut from OPEC and Russia in January 2019 will substantially increase oil prices, most experts believe that the maximum to be reached next year is $73 per barrel. Accounting for these estimates, it remains to be seen whether the 9% increase in government revenues next year is going to be attained in this time of low oil prices.
International institutions such as the IMF thought that the Kingdom would scrap its social benefits programme for 2019, thus halving its budget deficit. Notwithstanding, the budget deficit will account for 4.2% GDP next year, thus reflecting the continuation of the Citizens Account Programme which cost $13 billion in 2018 in order to mitigate the effects of the energy price reforms on the society. In addition to these allowances, student benefits are set to increase by 10%. Another source of concern is that a seizable part of the revenues increase is set to come from the oil sector. In fact, the 2019 budget anticipates an increase of oil revenues from $43.2 billion to $47 billion, providing that the Kingdom produces 10.2 million bpd with the oil barrel worth $80. This represents a year on year 10% increase, which does not go well with the government’s narrative of diversifying the economy away from oil.
More generally, the two biggest worries for the Saudi economy are high unemployment, at 12% of the labour force, and a somehow slow economic growth. One important development in the last years has been the “Saudisation” of the labour force whereby the government seeks to replace foreign workers with local workers. To reach this goal, taxes have been levied on private businesses employing foreigners. Going as much as $107 per month and set to increase year on year, this tax has caused the exodus of more than 900,000 foreigners from the Kingdom in the last 2 years. Theoretically, this exodus should have led to more employment among Saudis but it has not. Instead, the labour market has contracted and vacancies not filled as a result of locals not having the required skills and training. On the growth front, recent developments are welcome considering the recession faced in 2017. However, with figures not exceeding 2.4% per year until 2021, growth rates are much lower than what they have historically been in the Kingdom.
All in all, the unveiling of the budget has been met with lackluster reactions. The Tadawul stock exchange has seen drops of 1.05% today and the Kingdom’s yield on 10 year bonds have gone up, reflecting poor investor demand. It therefore remains to be seen whether the government’s reform will manage to substantially increase foreign investments in the Kingdom by creating a new and more attractive investment climate. Foreign Direct Investments to Saudi Arabia in 2017 were at an all time low of $1.4 billion. While numbers for 2018 are yet unclear, it is likely that FDI will be on the increase, in spite of recent events harming investors’ confidence. This increase should be good news for the country as it is said to be more heavily involved in the debt market in 2019.
Debt markets to further develop in 2019:
Since the ineffective austerity measures of 2015-2016, Saudi Arabia has turned toward debt markets to finance its budget deficits. This year, Saudi Arabia was the largest emerging market bond seller with $11 billions raised in April. This trend is likely to continue in 2019, especially since J.P.Morgan is set to include Saudi Arabia in its emerging market bonds indices in January 2019. In addition to Morgan Stanley Capital International’s (MSCI) inclusion of the Kingdom in its emerging markets indices this year, we are likely to see an increase of billions of passive flows into the country’s debt market.
According to Jadwa Investments, the Kingdom is set to finance half of its 2019 debt through international issues, which means around $17.5 billion of bond sales to international investors. Generally, debt issuances and government deposits at the Central Bank (SAMA) are going to finance next year’s budget deficit worth 4.2% GDP. Although this deficit might seem high, especially in light of the current bickering surrounding Italy’s budget deficit which stands at half of the Saudi deficit, the risk of bankruptcy for Saudi Arabia could not be more remote. Whilst Italy faces a public debt worth 130% of its GDP, Saudi Arabia’s debt will only stand at 22% GDP in 2019. Moreover, while the debt ceiling in the EU is put at 60% GDP, the self-imposed ceiling for the Kingdom is half that amount, thus making Saudi Arabia one of the least likely countries to default on its debt.
Worries over Saudi budget deficit are exaggerated:
In addition to a sound public debt level, it is important to stress that the budget deficit in Saudi Arabia keeps dropping from its astronomic level of 15% in 2015, when low oil prices greatly stretched the state’s finances. From 9% in 2017, to 7% this year and 4.2% next year, the Kingdom is increasingly likely to reach its goal of breaking even by 2023. Another welcome development in the Saudi budget is the consistent increase of non-oil revenues, from only 12% of government revenues in 2010 to 32% in 2019. This accounts for an increase of 4 percentage points from 2017. Additionally, the inflation rate in the Kingdom is set to keep decreasing from 2.8% in 2018 to 2.1% in 2020.
It is undeniable that the Saudi bureaucracy is getting more efficient at decreasing the budget deficit and extracting revenue. In the 2018 budget previsions, the 2019 deficit was estimated at 5%. We have seen that this number has been revised downward. Also, compared to the 2018 previsions, the 2019 revenues have been revised upward by 11%, thus reflecting a sound fiscal policy environment. Altogether, the Saudi government is able to capture 31% of the country’s GDP for its revenues, which is nearly twice more than Bahrain, another Gulf economy seeking to diversify its revenues from oil.
In this time of low oil prices, the Saudi government is compelled to stimulate growth and its expenditures continue to be the main driver of economic activity. High expenditure and budget deficits should therefore not be a cause of surprise among observers. 2019 will be the third consecutive year of fiscal loosening. This fiscal loosening has already brought its benefits with higher economic growth and is set to continue doing so. Although budget deficits and higher expenditures (especially in areas deemed non-necessary by the IMF, e.g. social benefits) could be worrisome in a general context, this might not necessarily be true for Saudi Arabia. As we have seen, the budget deficit is consistently decreasing and public debt levels are substantially lower than other G20 economies. The Kingdom should therefore be able to comfortably continue its policy of fiscal loosening, provided that its role in increasing oil prices is responsibly taken in the coming months.
Economic and fiscal reforms in the medium term:
Since 2015, Saudi Arabia seeks to have a comprehensive fiscal and economic framework over the medium term. Through the Fiscal Balance Programme (FBP), the government seeks to balance its budget by 2023 and subsequently reinforce fiscal discipline, develop non-oil revenues and enhance spending efficiency. In a recent speech, King Salman reiterated these objectives by declaring that the government was “determined to go ahead with economic reform”, achieve fiscal discipline, improve transparency and empower the private sector.
To reach these objectives, the government has adopted various programmes meant to speed up structural reforms to stimulate growth and create employment for Saudis. Such programmes are the Citizens Account Programme -giving monthly allowances of $266 to civil and military personnel-, a Private Sector Stimulus Package worth $53.3 billion in the medium term as well as other Vision 2030 initiatives such as the National Entrepreneurship Programme, the Small and Medium Enterprises Programme and the Strategic Partnership Programme, all meant to support economic development from the private sector.
Additionally, the government is also set to further draw on its National Industrial Development and Logistics Programme which aims to enhance the contribution of local content, resulting in projects such as SAMI – a local arms manufacturer set to become one of the world 25 largest arms producer by 2030- and Spark, an energy park in the East of the Kingdom. The government is also drawing more of its attention to education. Military spending is set to decrease by 12% next year. Although the education’s budget is also set to slightly decrease, it has now the largest share in the budget at 21%. Health and social development on the other hand is set to see a 4 point percentage increase in the share of the budget, reaching 18% in 2019.
On the fiscal front, the Kingdom is also undergoing significant bureaucratic reforms and applying interesting reforms. The Ministry of Finance is itself made of five important units: the Macro and Fiscal Policy Unit, the Debt Management Unit, the Fiscal Balance Programme Office, the Non-Oil Revenue Development Centre and the Spending Efficiency Realisation Centre (SERC), which is itself made of different units such as the Strategic Procurement Unit which is highly regulated by the new Government Tenders and Procurement Law. The SERC is especially important for the Ministry’s fiscal rationalisation and efficiency objectives. It is tasked with analysing government budgets, revising their costs and projects, thus increasing the efficiency of the government’s capital and operational expenditure.
This rationalisation goal has also been pursued through a rather new development in Saudi Arabia: taxes. In early 2018, a VAT of 5% has been leveled across the Kingdom and is set to be expanded to other GCC countries in the following years, starting with Bahrain in January 2019. Currently, companies with annual sales exceeding $100,000 are registering for the tax. Prior to that, only companies with annual sales worth $266,666 were subject to the VAT. In Addition to the VAT, expat levies and important energy price reforms, Saudi Arabia has also imposed excise taxes on products like soft drinks, energy drinks, tobacco and its derivatives. Overall, as aforementioned, the Saudi government is increasingly applying measures ensuring that budget revenue sources are more diversified and more substantial than in the past.
Finally, E-governance has also been at the centre of fiscal reforms in the country. More particularly, the digital platform Etimad has greatly streamlined fiscal measures and the electronic registration of contracts in the country. In its first six months of existence, the platform has registered 14,000 contracts and 35,000 electronic tenders from private sector actors. With more than 20 integrated services dispatched between its Budget Management, Tenders and Procurement Management, Contract and Award Management, Payment Management and Financial Rights of Employees Management packages, Etimad is likely to have a positive impact on the modernisation of the Saudi bureaucracy.
Bloomberg, 19 December 2018, “Saudi Budget’s Estimate for Oil Is Seen as ‘Wishful Thinking’’
Saudi Arabia Minister of Finance, September 2018, “Pre-Budget Statement 2019”
The New Arab, 19 December 2018, “Saudi spending to hit record high despite drop in oil prices”
CNBC, 18 December 2018, “Saudi Arabia’s 2019 budget will boost spending and continue royal handouts – even as oil prices drop”
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