Riyadh- Decypha: Saudi Arabia suffered a severe financial crisis as international oil prices plummeted, further worsening the effect was the fierce shale competition that started tore-emerge. In efforts to control the first-ever budget deficit in modern history, the kingdom adopted several economic reform measures, which later contributed in the decline of the budget deficitin the first quarter (Q1-17), on higher oil prices as well.
While the country has invested efforts into diversifying beyond oil, adopting some level of austerity measures, and implementing several state-led reform procedures, the deficit improvement has been largely attributed —by experts such as Fitch Ratings—to the rebound of oil prices.
Drivers of Improvement
With deficit skyrocketing to SAR 367 billion in 2015, estimates for 2016 were expected to be on a similar level hitting SAR 326 billion; nevertheless posting a slight relief for the government, Saudi Arabia’s budget deficit in 2016 came 8.9% less than initial expectations, registering SAR 297 billion, recording a 71% decline, as stated by Finance Minister, Mohammed Al Jadaan, in a press conference on 11 May.
The deficit decline was attributed by Al Jadaan to a 72% quarter-on-quarter (QoQ) increase in revenues in Q1-17, at SAR 144 billion, while the expenditures recorded SAR 170 billion, Al Arabiya English reported this month. In addition, Saudi’s non-oil revenues for the same quarter recorded SAR 32 billion.
Riyadh has also benefited from increases by 4% in income tax revenues, 8% in products and services taxes, 27% in tax trade and 46% in Zakat revenues, according to Al Jadaan.
Eyeing more inclusive economic reforms, Saudi Arabia is looking up to boost the employability of the private sector and their contribution in the GDP, as part of its Saudi Arabia 2030 Vision, Al Jadaan further elaborated.
Reform Measures Taken
Attempting to stabilize the Saudi economy, Deputy Crown Prince Mohammed bin Salman announced ambitious economic reform measures in April 2016, including energy subsidy cuts, tax hikes, sales of state properties and more private sector investment.
The reform plan includes reducing state payroll, engaging women into the workforce, and attracting more foreign investment.
Saudi’s National Transformation Program imposed a long-term goal of saving up to SAR 200 billion by 2020. Towards that aim, it started raising fuel prices in 2015 from SAR 0.60/litre of petrol to SAR 0.90/litre.
To generate more revenue, the government is predicted to impose a value-added tax and a unified income tax in early 2018 to generate more revenues.
“A cutback in government jobs might affect the areas outside of the big cities more,” Gregory Gause, a professor of international affairs at Texas A&M University told Bloomberg in December, adding that Saudi locals doubt the possibility of cutting government spending.
Other analysts, such as dean of the business school at Sulaiman Al Rajhi College Obaid Al-Motairy, are already feeling the change in salaries, “the region is being squeezed by budget[…] life is changing,” he said in the same Bloomberg report.
Furthermore, the government will not use domestic bonds to control the deficit as a result of the cash crunch that restricted banks in 2016, Chief Economist at Abu Dhabi Commercial Bank, Monica Malik, told Bloomberg in April. “We expect that the authorities will look to reduce the pace of foreign-exchange draw-downs in the coming months,” she said.
Promising Outlook for 2017
The Saudi budget deficit is expected to fall in 2017, according to research note by Bank of America Merrill Lynch in March.
BofA Merrill Lynch forecasts a 12% of GDP budget deficit, compared to 16.9% of GDP fiscal deficit in 2016, which was described by the research to have been in line with the government’s target, although it said that repayment of contractor arrears and projects’ spending have contributed to pushing the deficit upwards.
Giving predictions, BofA Merrill Lynch added that the forecasted growth in the non-oil sector would help in narrowing the fiscal deficit, as well as the 2017 budget targets of supporting higher oil prices.
Commenting on the Saudi 2017 budget, Al Jadaan said in May that the budget is “in line” with the International Monetary Fund (IMF) with regards to slow austerity policies, and “going in the right direction.”
As the IMF advised Saudi Arabia this month not to be harsh in fiscal policy, stating that the fast budget deficit decline could harm the economy, Al Jadaan noted in Mat conference that the government has not decided yet their reform criteria of energy and fuel prices.
Vice Minister of Economy and Planning, Mohammed Al Tuwaijri, said in the same conference that energy price study could be finalised this year or early 2018.
Meanwhile, investors are happy with the open discussion on the future of the Saudi economy. CEO of AMAC Investments Mohammed Al Omran told Al Arabiya English: “We are seeing much more transparency from the Saudi finance ministry compared to years past. This plays a huge role in key stakeholders across the kingdom in terms of managing finances and expectations as we prepare for the rest of the year.”
Saudi Arabia’s all time high-quality credit rating from the Fitch agency, dropped to A+ from AA- on the deterioration of state finances, Fitch said in May, attributing a “wider than expected” budget deficit in 2016.
Cutting state expenditures on construction projects and social programs would help the kingdom reduce the deficit for 2017, Washington D.C.-based analyst Gregory Brew told OilPrice in January “If international oil prices stay where the Saudis expect them to, between $50 and $43 per barrel, the budget gap in 2017 will be smaller,” he said.
After a tough year for the Saudi government in 2016, the 2030 vision would help ease the situation, Chief Financial Officer at SABIC, Mosaed Al Ohali, told CNN Money in May.
With the oil prices on the rebound, reform measures in action, the Kingdom’s economy is expected to see further improvement. Nevertheless, with still significant dependency on oil, economic stability will remain proportionally linked to the degree of diversification beyond oil.
By Doaa Farid
