Here’s what analysts are saying about Saudi Arabia’s 2019 budget

Saudi Arabia’s King Salman on Tuesday approved state budget for 2019 - the largest budget in its history. The government is aiming to reduce the headline budget deficit to SAR 131 billion, amounting to 4.2 percent of gross domestic product (GDP) in 2019, from an estimated SAR 136 billion which is 4.6 percent of GDP  in 2018.

Public spending in this budget is envisaged at SAR 1.106 trillion, approximately 7 percent higher than the projected expenditure by the end of fiscal year 2018. Revenues come in at SAR 975 billion, up 9 percent over expected revenue by the end of 2018.

Read: King Salman approves Saudi Arabia’s largest budget in history

Argaam discussed the implications of the 2019 budget on the Saudi economy and the volatile oil prices with analysts.

Here’s what they had to say:

1) Mazen Alsudairi, head of research at Al Rajhi Capital, expects that the budget will help boost growth because overall expenditure increased by 11 percent in 2018 and will increase by 7 percent in 2019.

He presented an optimistic view about the oil prices as well. “Based on our calculations, the implied price (WTI) required to meet fiscal revenue targets announced by the Saudi government is around $70 per barrel. We see it as achievable because right now oil prices are irrationally depressed and unsustainable at these levels,” Alsudairi said.

2) Abdullah Hamad Al Fozan, chairman at KPMG Saudi Arabia, said that reduction in the fiscal deficit will support the government to move towards fiscal sustainability and balance by 2023.

“Reduction in the fiscal deficit will be driven by the fiscal reforms undertaken by the government, including energy price reforms, implementation of Value Added Tax (VAT), excise taxes, and expat levies, coupled with the rise in oil prices for the first three quarters of 2018, which will support the government to move towards fiscal sustainability and balance by 2023,” Fozan said.

“Borrowing costs will drop as the amount borrowed to meet deficit will reduce and more funds will be available for private sector from banks and other financial institutions,” he further added.

Fozan expects oil to remain a major contributor to the Kingdom’s revenue, despite its share in the total public revenue diminishing by 2 percent to reach 69 percent in 2019.

“Even though oil is the primary source of revenue for the government and has historically shown fluctuations in prices, we believe that the government’s plan to diversify the economy is unlikely to be delayed despite the increase in oil prices,” he noted.

Read: Saudi 2019 budget allocates SAR 33 bln for energy, mining: Al-Falih

3) Vijay Valecha, chief market analyst at Century Financial, said that Saudi Arabia, the biggest Arab economy, has gone for an expansionary budget in 2019 as it increases its overall outlay by 7 percent.

“The budget will certainly help in boosting the economic growth, even as it expects the fiscal deficit to stay at 4.2 percent of the GDP. Even though oil prices have declined sharply during the past few weeks, the deficit assumptions are not expected to change much as sanctions on a major oil producer is likely to remove significant amount of supply by Q2 2019,” Valecha said.

He highlighted education as a key aspect of Saudi Arabia’s budget, adding that it is the largest spending component currently, with military spending declining by 12 percent when compared to last year. “This indicates a key shift in policy priorities of the government and will help it in achieving its reform objectives for 2030,” Valecha noted.

Crude oil price assumptions used in budget calculations are likely to be much higher than current market price, Valecha mentioned. “This could prevent Saudi Arabia from raising its oil production to prevent a plunge in prices,” he added.

4) Fahad Alturki, chief economist and head of research at Jadwa Investment, said that

Keeping in line with the recent budgets, part of the 2019 budget will be channeled towards Vision 2030 programs that directly contribute to economic growth and job opportunities for citizens.

“The most economically vulnerable households will continue to benefit directly from necessary support under initiatives such as the Citizen’s Account, but also indirectly through spending on educational, healthcare and social infrastructure,” Alturki said.

He highlighted the fact that the outlook for Brent oil prices in 2019 remains highly uncertain. “The outlook for 2019 remains highly uncertain with Brent oil currently trading around $60 per barrel (pb). That said, budgeted oil revenue is expected to rise by 9 percent year-on-year (YoY) in 2019, which we believe, takes into account for compliance with the recent OPEC+ cuts,” Alturki added.

Write to Paromita Dey at paromita.d@argaamplus.com