Sunday 13, May 2018 by Jessica Combes

Widening KSA fiscal deficit confirms strategy towards real GDP growth

 

Saudi Arabia’s fiscal deficit widened in Q1 2018 to $9.2 billion (-5.4 per cent of GDP) from $7.0 billion (-4.1 per cent of GDP) in Q1 2017.

According to Mitsubishi UFJ Financial Group (MUFG) a series of public sector pay-outs more than offset the increase in revenues from the introduction of VAT and other administrative levies. Whilst these fiscal figures highlight the challenges the Kingdom faces in consolidating its finances and delivering on productive and efficient public spending, the authorities’ focus in sticking to the Budget 2018 path of provisioning an expansionary fiscal policy reflects the willingness to support economic growth.

With the recent surge in oil prices not yet fully reflected in the fiscal results suggests that the shortfall is likely to narrow for the reminder of the year. Government expenditures ($53.5 billion) rose 17.8 per cent y/y in Q1 2018. Significantly higher current expenditures offset a small fall in capital expenditures 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 per cent hike in fuel prices. The authorities have also budgeted $8 billion (1.1 per cent of GDP) for payments to lower income households under the Citizens Account to soften the impact of news taxes and fuel/electricity price hikes. In effect, one result of cuts in implicit subsidies (which impact the budget through lower dividends from entities such as Aramco) has been to lead to higher on budget subsidies and transfers. On a sectoral basis, military, social development and healthcare related expenditures have risen sharply, while expenditures on municipal services, education, and infrastructure have been cut from a year earlier.

The rise in expenditures exceeded nonhydrocarbon revenues in the first quarter by 0.4 per cent 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. Not surprisingly, the Saudi PMI activity index fell to 52.8 in March, and more recently to a multi-year low in April to 51.4 (down from 57.3 in December before the new taxes and price hikes). Government revenues ($44.3 billion) rose 15.4 per cent y/y in Q1 2018. Oil revenues were only marginally higher ($30.4 billion; 1.7 per cent y/y), and instead the lion’s share of the increase came from non-oil revenues ($14.0 billion; 63.1 per cent y/y). The trivial rise in oil revenues (despite the sharp rise in oil prices) came due to a shift to quarterly dividends from Saudi Aramco (instead of monthly earnings prior).

The authorities have indicated that the recent jump in oil prices will be largely reflected in the fiscal data in Q2 2018. Meanwhile, the precipitous increase in non-oil revenues was predominantly on the back of the introduction of VAT in January which more than tripled tax receipts from goods and services, accounting for almost half of nonoil revenues and exceeding expectations. The authorities have also doubled the levy on foreign nationals’ dependents to SAR200 ($53.3) per month in 2018 and imposed a monthly fee of SAR 300-400 ($80-106.7) per foreign worker on entities.

While new fees and taxes have raised aggregate fiscal revenues, economic activity has been subdued, eroding the existing tax base. Looking ahead, expectations are that 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.

On the whole, unlike in previous years, the authorities have shown a willingness to adjust policies in line with changing oil market dynamics. These changes, which signal a recognition of the limits of the rentier state model, could usher a gradual move away from handouts to more of a sustainable growth model. The consequences are likely to be profound, both politically and socially, notably on societal relations and the nature of the social contract.

  

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