Monday 20 May 2019

Dr Paul Wetterwald

Saudi deficit declines in first nine months

RIYADH, November 14, 2018

An impressive reduction in Saudi Arabia’s budget deficit occurred during the first 9 months of 2018, which happened despite a 25 per cent increase in government spending, said an industry expert.

This is linked on one side to the rise of the oil price as the WTI price has averaged $67 per barrel so far in 2018 compared to $51 per barrel in 2017, added Dr Paul Wetterwald, chief economist for Indosuez Wealth Management, the global wealth management division of Crédit Agricole.

On the other side, non-oil income also increased dramatically. According to the government this “reflects the effectiveness of economic reforms and fiscal measures targeting fiscal sustainability as well as the effective management of public finances”. The government is targeting a fiscal deficit of 7.3 per cent of GDP this year and a balanced budget by 2023. According to the IMF’s estimates, a WTI oil price close to $88 per barrel would be required to balance the 2018 budget.

Despite this deficit reduction, the debt-to-GDP ratio is set to rise over the coming years. Given a 3.3 per cent weighted average coupon for Saudi bonds, and a 2017 debt-to-nominal GDP ratio of 17.1 per cent, the cost of servicing the debt amounts to $3’875 million (3.3 per cent x 17.1 per cent x $686’738 million) per year.

Deducting this amount from the 2018 projected total deficit ($52 billion) gives us the primary deficit, that is roughly $48 billion, or 6.7 per cent of GDP. With such a deficit, even the 17.8 per cent year-on-year (YoY) nominal GDP growth recorded in Q2 2018 is not high enough to stabilise the debt-to-GDP ratio.

The latter could reach 24.2 per cent by 2023 (IMF Fiscal Monitor, April 2018). We also note that the weight of debt in percentage of GDP, close to 20 per cent, is not very different to that of its regional peer, the United Arab Emirates (UAE). However, in contrast the UAE’s debt-to-GDP ratio is on a stabilising path.

That being said, Saudi Arabia’s government has been trying to reduce its dependency on oil revenue. Amongst the various measures to rebalance its budget it introduced a 5 per cent value-added tax (VAT) on 1 January 2018. It was no surprise that this plan had a negative impact on the business climate in the non-oil sector, as can be seen in the sharp decrease in the purchasing managers index (PMI) to an all-time low of 51.4 in April 2018. Nevertheless, the PMI managed to stay above the 50 boom/bust line, and rebounded to 53.8 in October.

Obtaining the most up-to-date assessments of growth requires more frequent indicators than quarterly GDP figures alone (for example oil prices, ATM withdrawals, etc.). Using these variables we now expect nominal GDP growth to slow down somewhat following the strong Q2 figure.

With regards to inflation, it is still impacted by the introduction of VAT earlier this year and in September the CPI increased by 2.1 per cent YoY. This base-effect will dissipate next January.

The most recent data suggests some kind of stabilisation, but resisting the temptation to re-expand government spending in line with higher oil prices will remain a challenge. - TradeArabia News Service

Tags: Oil | VAT |

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