Saudi Arabia to keep tight fiscal grip on economy

LONDON: Saudi Arabia could boost spending in today’s much-anticipated 2018 budget following a recovery in oil prices, while maintaining a tight grip on its fiscal policy, analysts forecast.

The deficit is likely to have narrowed from 12.5 percent of the gross domestic product (GDP) in 2016 to 5.5 percent of GDP this year, Capital Economics estimates.

“We’re expecting the authorities to continue to work toward narrowing the budget deficit in 2018,” said Khatija Haque, head of MENA Research at Emirates NBD.

“On the revenue side, higher expected oil prices will help, and projected non-oil revenue should rise as well relative to 2017. On the expenditure side, we expect total spending to rise slightly, as cuts to subsidies will likely be offset by increased spending in other components of the budget,” she said.

According to Ministry of Finance data, the deficit stood at SR121.5 billion ($32.4 billion) for the first nine months of 2017 — a decline of 40 percent year-on-year. Government revenue had reached SR450.1 billion, an increase of 23 percent.

Nishit Lakhotia, head of research at SICO Bahrain, also predicted an increase in spending next year after a year of fiscal constraint.
“The Kingdom will likely undershoot on its spending on infrastructure and transportation in 2017 given that only 34 percent of budgeted amount was actually spent in the first nine months of 2017, and accordingly in 2018 there might be a catch up on this space,” he said, adding that military spending is likely to remain high.

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Due to the weak oil price in recent years, Saudi Arabia’s budget deficit reached 14.8 percent of GDP in 2015, which forced the Kingdom to implement a series of fiscal and economic reforms designed to balance the books and drive growth in the non-oil sector.

The Kingdom cut spending while hiking the price of fuel, electricity and water. In last year’s budget, it announced plans to introduce value-added tax (VAT) in 2018. Analysts expect only a slight loosening of policy next year, despite the anticipated improvements to the government balance sheet.

“While fiscal policy will continue to be tightened in 2018, it’s worth noting that austerity will still be less harsh than it was in 2015-16,” said Jason Tuvey, Middle East economist at Capital Economics, in a research note.

“Against this backdrop, the recovery in the non-oil sector should continue, but it will remain slow-going,” he said.
Most analysts are anticipating that today’s budget will pave the way for further economic growth.

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“Non-oil growth should be supported by increased government spending in some areas, such as housing, while higher expected oil prices should boost sentiment and overall liquidity,” said Haque.

“2018 will be the year of growth of the economy,” said John Sfakianakis, director of economic research at the Gulf Research Center in Riyadh. “The non-oil economy is expected to pick up next year as structural reforms are beginning to bear results.”

Lakhotia said he had a “positive bias” for the economy next year, citing measures including VAT, increasing expat levies, full-year benefit from sin taxes which were introduced in the second half of 2017 — all helping to boost non-oil income.

The budget is likely to reflect significantly increased fiscal discipline while focusing on key sectors including infrastructure, health and education, said Nadi Bargouti, head of asset management at Emirates Investment Bank.
“We are seeing more efficiency on spending,” Bargouti said.

Source Credit: Arab News

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