Saudi Arabia’s 1Q18 budget deficit stood at SAR34.3bn (USD9.2bn), widening 31% Y-o-Y and c18% of the total gap forecast for 2018, the Finance Ministry said Monday. Revenues grew 15% Y-o-Y to SAR166.3bn, driven predominantly by rising non-oil revenues, which jumped 63% Y-o-Y to SAR52bn, thanks to implementation of the value-added tax (VAT). Oil revenues were up only 1.7%, which was a surprise, given the 23% Y-o-Y increase in oil prices as well as the rise in domestic fuel prices. The strong growth in revenues was overweighed by an 18% Y-o-Y growth in expenditure, driven entirely by current expenditure (up 24% Y-o-Y) as investment spending contracted 11% Y-o-Y, supporting all anecdotal evidence that the public capex cycle is yet to kick-in. Growth in current expenditures was driven by a surprising 20% Y-o-Y growth in wages as well as rising spending on various kinds of social benefits, including the citizen account.
 
Our take: Overall, the budget numbers were a showcase for a weak macro backdrop in Saudi Arabia. The growth in non-oil revenues is clearly a positive, finally boosting non-oil revenues in a sustainable manner, though it fell short of keeping pace with a rise in spending that came to offset the income-erosion effect of fiscal consolidation. The 11% decline in capex confirms our view that it will take some time for the gov’t to start pressing ahead with its major capex plans announced late last year. We expect the deficit position to improve over the course of 2018, thanks largely to rising oil prices, especially given Aramco’s changed royalty structure. We forecast a fiscal deficit of 7.3% of GDP in 2018, narrowing from 9% in 2017, with upside risks to our numbers, given the recent rally in oil prices.

 Mohamed Abu Basha