Non-oil revenues drive 9% narrower deficit Y-o-Y in 3Q17

Saudi Arabia’s budget showed a 9% Y-o-Y decline in the fiscal deficit to SAR49bn (USD13bn), thanks to an 80% Y-o-Y increase in non-oil revenues, which compensated for i) 7% Y-o-Y decline in oil revenues; and ii) 5% growth in expenditures. Sharp growth in non-oil revenues reversed a poor performance in 1H17 (contracted 12% Y-o-Y), driven by non-tax revenues, the drivers of which are still difficult to assess, given the limited disclosure. Last year, growth in non-oil revenues was driven predominantly by SAMA’s returns, as well as unidentified sources, which we assume are revenues from government-related entities. On a 9M basis, the deficit has narrowed 40% Y-o-Y to USD32bn, driven, predominantly, by 33% Y-o-Y growth in oil revenues; non-oil revenues are up only 6% Y-o-Y, and spending was flat (see Fig. 2). 
 
Reversal of allowance cuts drives growth in spending for the first time this year; capital expenditure still in the red

Another key highlight of the data was the 5% Y-o-Y growth in total expenditure, driven by a 7% increase in current expenditures, as the decision in May to reverse allowance cuts kicked in. Indeed, the public wage bill was up 9% Y-o-Y after contracting in first two quarters of the year; thereby, driving overall spending growth. Meanwhile, investment spending remained in the red, though contraction narrowed to only 1% Y-o-Y vs. 12% in the preceding quarter, highlighting the fiscal retrenchment’s weighing on economic activity.
 
On track to beat budgeted deficit; awaiting stimulus packages in 2018 to support growth

 At 61% of the budgeted deficit, 9M17 fiscal outturn indicates that the gov’t is heading for a narrower deficit than budgeted. This is still contingent upon spending restraint in 4Q, which typically sees more than 40% spending. Such improvement in fiscal balances has been coming at the expense of growth; therefore, the gov’t announced it is planning an expansionary budget in 2018, including stimulus packages (details are likely to be announced before year-end). We maintain our view though that the macroeconomic environment will remain under pressure, probably up to end of 1H17, given the planned fiscal retrenchment measures of i) fuel prices hike; and ii) implementation of the GCC’s thus far broadest-based VAT on 1 Jan 2018.