Saudi non-oil revenues to increase in 2018: BofAML

Economic activity in Saudi Arabia’s non-oil sector will remain sluggish in the short-term before picking up next year as fiscal reforms kick in, Bank of America Merrill Lynch said in a report on Tuesday.

Saudi non-hydrocarbon real GDP growth stood at 0.6 percent year-on-year (YoY) in Q1, suggesting that the economy “may not avoid a headline recession this year as the OPEC-mandated oil production cuts drive real GDP growth to negative territory,” the report said.

While political developments and the seasonal increase in domestic energy consumption may have delayed the next round of fiscal reforms, the reforms are still expected to take place by year-end.

“The weak economy complicates the government's plans to implement further fiscal reforms. This may suggest a more back-loaded path for fiscal consolidation or the concurrent introduction of a private sector support package alongside fiscal reforms,” the bank added.

Nevertheless, non-oil revenues are likely to increase materially starting from next year as the government’s economic reforms start to take effect.

The excise tax on soft drinks, tobacco and energy drinks as well as the expat dependent fees could add in SAR 7.5 billion of non-oil revenues in the second half of 2017.

Meanwhile, measures like the introduction of value-added tax (VAT), an expatriate worker levy, possible tariffs on luxury products, and the increase in expat dependent fees could add SAR 80 billion to non-oil revenues next year.

Saudi Arabia’s economy, like those of other oil-exporting GCC nations, was hit hard by the crash in crude prices in mid-2014, which led to large-scale cutbacks in spending and the introduction of the ambitious Vision 2030 economic diversification plan last year.

The Kingdom’s spending discipline in the wake of low oil prices has been on track so far this year, but could be tested in the second half on seasonal factors and the reversal of public sector allowance cuts, BofAML said. 

Fiscal austerity, together with higher oil revenues, has been helping improve Saudi Arabia’s fiscal deficit. Second-quarter fiscal deficit stood at SAR 46.5 billion ($12.5bn), while the H1 deficit came in at SAR 73 billion.

“Simplistically, the fiscal deficit target of the authorities (SAR 198 billion; 7.8 percent of GDP) could be within reach for 2017 at the current pace excluding any off-budget spending and seasonality. This is well below our expectations of SAR 326 billion (12.8 percent of GDP) and last year's outturn of SAR 416 billion (17.2 percent of GDP),” BofAML said.