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05-Aug-2019

Saudi Arabia Economics - 2Q19 budget outturn: Back to reality

Fiscal balance back in the red on lower oil prices, higher spending

Saudi Arabia’s fiscal deficit widened 4.6x on an annual basis in 2Q19 to SAR33.5bn (USD9bn), driven by lower oil prices and rapid growth in investment spending. The balance is back in the red after 1Q19’s surprising surplus, which authorities attributed to a special dividend from Aramco, reflecting a more accurate picture of the Kingdom’s fiscal fundamentals. Total revenues contracted 4.7% Y-o-Y against an exactly equal expansion in spending, leading to a widening deficit. Below are the highlights of the outturn:
 - Oil revenues – A 5% Y-o-Y drop is in line with both lower oil prices and production, though revenues for the quarter were the second highest in the past 3.5 years.
 - Non-oil revenues – Drop is entirely driven by non-tax revenues (down 36.5% Y-o-Y); this line in the budget has been typically quite erratic on a quarterly basis, given the nature of its flows (dividends from state-owned enterprises/institutions, proceeds from corruption cases, etc.). Meanwhile, tax revenues were up 20% Y-o-Y, largely driven by the increase in expat levy, as projected by the draft budget, and some ramp-up of VAT as well.
 - Current spending – It was largely flat Y-o-Y, as a sharp jump in spending on subsidies (mostly reflecting spending on the SAR72bn stimulus package announced last year) and social benefits (higher spending on Citizen Account, social security and student bonuses) was balanced with a nearly unchanged wage bill.
 - Investment spending – A significant 27% Y-o-Y jump, with strong growth for the second consecutive quarter.
 - Non-oil deficit – Lower non-oil revenues contrasted with higher spending meant the non-oil deficit also widened 9% Y-o-Y to SAR208bn. This continues to reflect the budget’s heavy reliance on oil revenues to fund higher spending. 
 
Double-digit growth in investment spending

By far the key highlight of 2Q19 numbers: Investment spending expanding 27% Y-o-Y, reaching the third highest quarterly level in the past 3.5 years and coming after a 12.4% Y-o-Y growth in 1Q19. The consistent rise in public investment is an indication that the gov’t is back in the mood of supporting growth and is one of the drivers of the uptick we have seen in economic growth so far this year. Indeed, private sector non-oil real GDP growth hit its highest level in three years in 1Q19, growing at 2.3%, and indicators suggest growth remained strong in 2Q19. The pick-up in investment spending by the Public Investment Fund and normalisation in consumer spending are also factors driving this uptick in economic activity YTD. It is noticeable, however, that these trends are coming from a low base and are yet to drive a fundamentally stronger growth outlook for the Kingdom. The pick-up in investment spending has so far failed to reflect either on cement deliveries – which contracted for the 13th consecutive quarter in 2Q19 – or on credit growth, which has failed so far to depict any signs of credible recovery. A small uptick in project awards in 1H19 has been entirely driven by oil and gas, with awards in the construction sector dropping 32% Y-o-Y. We also remind readers that the budget is being done on a cash basis; hence, it is not always reflective of new trends.
 
Project narrower deficit in 2019, thanks to special dividend in 1Q19

We update our fiscal projections to reflect: i) higher investment spending in 1H19, which does suggest the gov’t is on track to hit its target for 20% annual growth in 2019 (we were sceptical of these targets); and ii) 1Q19’s surprising surplus. With a net increase in revenues of cSAR40bn, thanks to 1Q19’s special dividend, we reduce our forecasted 2019 fiscal deficit to SAR102bn, down from SAR143bn. This translates to a deficit of 3.4% of GDP, narrowing from 4.6% in 2018 and below the budgeted 5.9%. Meanwhile, the non-oil fiscal deficit is set to widen 5% Y-o-Y to SAR782bn, equivalent to 40.2% of GDP. This would be the widest deficit in two years, showing that the additional spending has been increasingly funded by oil revenues, on which the budget remains heavily reliant.

Mohamed Abu Basha

Mostafa El Bakly