Saudi Q1 fiscal deficit widens, but strategy in-line for growth

Saudi Arabia’s fiscal deficit widened to $9.2 billion year-on-year (YoY) in Q1 2018 from $7 billion, validating its "strategy towards enhancing real GDP growth", MUFG Bank, said in a recent report.

"A series of public sector payouts more than offset the increase in revenues from the introduction of value-added tax (VAT) and other administrative levies," it noted.

While these quarterly fiscal figures highlight the challenges, the Kingdom faces in consolidating its finances and delivering on productive and efficient public spending, Japan's largest bank said it takes comfort from the authorities focus in sticking to the budget 2018 path of provisioning an expansionary fiscal policy, reflecting the willingness to support economic growth.

With the recent surge in oil prices not yet fully reflected in the fiscal results (expectations are higher oil prices will reflect in Q2 2018 data) suggests that the shortfall is likely to narrow for the reminder of the year.

Government expenditures rose 17.8 percent YoY in Q1 2018 to $53.5 billion, as significantly higher current spending offset a small fall in capital expenditure last quarter.

In January, King Salman announced a SAR1,000 ($267) per month allowance to state employees, retirees, and military personnel in 2018 to offset the rising cost of living after the imposition of VAT and an 80 percent hike in fuel prices. The authorities also budgeted $8 billion (1.1 percent of GDP) for payments to lower income households under the Citizens Account program to soften the impact of new taxes and fuel/electricity price hikes.

"The rise in expenditures exceeded non-hydrocarbon revenues in Q1 by 0.4 percent of GDP, but we believe that any positive impact on growth from this would have been hit by subsidy cuts, including fuel and electricity price increases," the report added.

Meanwhile, government revenues rose 15.4 percent YoY in Q1 2018 to $44.3 billion. Oil revenues rose by 1.7 percent YoY at $30.4 billion but the lion’s share of the increase came from non-oil revenues at $14 billion; up 63.1 percent YoY.

Looking ahead, MUFG said it expects the budget deficit will narrow for the remainder of 2018.

The fiscal strategy, in line with the Budget 2018 path is a "marked shift" with the earlier strategy of focusing on deficit reduction with the attention now on stimulus rather than austerity.

"This is a pragmatic approach and real GDP growth enhancing," the bank noted.

From an economic growth perspective - three years after oil prices began to precipitously fall - the bank said it sees "some signs that Saudi Arabia has begun to adjust to the weaker energy earnings environment".

"We view economic growth to start to trend upwards in 2018 and beyond, the turnaround will come from the first contraction witnessed in the economy in 10 years (real GDP growth of -0.7 percent in 2017), with the average pace of expansion likely to run at around 1.7-2.2 percent."

 In the near term, the MUFG said a stronger oil price will boost the Kingdom’s prospects, particularly if USD weakness and a shallow Fed hiking cycle curtail monetary pressures.