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10-Nov-2019

Saudi Arabia Economics: 3Q19 budget outturn – Deficit contained sequentially despite falling oil revenue and higher spending

Fiscal balance remains in the red on lower oil revenue and higher spending

Saudi Arabia’s fiscal deficit widened by 4.4x on an annual basis in 3Q19 to SAR32.6bn (USD8.6bn) driven by lower oil revenue and higher spending. Total revenue declined 7.2% Y-o-Y with spending up 3.8% Y-o-Y in 3Q19, leading to a wider fiscal deficit. The latter, however, was largely stable on a quarterly basis thanks to rising non-oil revenue. The numbers did not carry any surprises and hint that the deficit is indeed on track to meet the government’s deficit target of SAR131bn (note that the deficit in 4Q is typically the largest in the year as most spending takes place in this quarter). Below are the key highlights of the outturn:
 
•  Oil revenue – Fell by 14.4% Y-o-Y matching a drop in production (following the attack on Aramco’s facilities) and prices 
•  Non-oil revenue – Rose by 8.7% Y-o-Y on the back of an 18% increase in tax revenue, which continued to display strong growth driven by the continued collection of VAT and expat levy revenue
•  Current expenditure – Grew 7% Y-o-Y on the back of sharp jumps in both the wage bill (10.5% Y-o-Y) and use of goods and services (42% Y-o-Y), despite a decrease in spending on social benefits and subsidies 
•  Investment spending – A surprising drop of 13.4% Y-o-Y, likely reflecting some quarterly volatility in spending patterns rather than any intentional scaling back of spending
•  Non-oil deficit – Decent non-oil revenue growth meant that higher spending was largely mitigated, leading to only a 2% Y-o-Y widening in the non-oil fiscal deficit 
 
Non-oil revenue cushions overall fiscal balance

The positive highlight in the outturn was that the deficit contracted by 5% on a sequential basis despite the drop in oil revenue and higher spending. The small drop in oil revenue also indicated the impact of the attacks was minimal on overall fiscal balances. Non-oil revenue remains largely driven by two key factors: VAT and expat levy. In 2019, the gov’t lowered the threshold for VAT registration, thereby boosting revenue by widening the tax base. Phase three of the expat levy was implemented in mid-2019, hence boosting state coffers; expat levy is increasingly carrying a bigger weight in overall non-oil revenue and is set to account for +90% of the annual increases in non-oil revenue this year as per the official budget. We note though that the largely stable sequential fiscal balance was also clearly supported by a 13% Y-o-Y drop in capex spending against 22% Y-o-Y growth in 1H19. We see this drop as a one-off, reflecting quarterly volatility in spending, and continue to expect non-oil GDP growth to accelerate this year to a four-year high of 2.7%. Indeed, economic indicators continue to point to a stabilising macro situation, which is driving a 27% Y-o-Y pickup in project awards in 9M19 and a PMI that hit a four-year high in October.
 
We tweak our fiscal estimates in light of 2020 budget statement

The recently released 2020 Budget Statement confirmed the government’s intention to reduce spending starting from next year in order to reach a balanced budget by 2023. However, the gov’t has cut spending by more than it initially planned as it also cut its revenue estimates, likely due to lower oil price projections. We tweak our numbers to reflect a 2% decline in expenditure p.a. for the next two years and slightly higher non-oil revenue, leading us to reduce our fiscal deficit to 5.2% of GDP in 2020e and 3.5% in 2021e (based on oil price assumption of USD70/bbl). The combination of lower spending and higher non-oil revenue mean our estimated budget break-even oil price has been reduced to USD76/bbl in 2020 and USD71/bbl in 2021. This leaves the budget in a relatively stronger fiscal position as the burden of driving economic growth is transferred to the Public Investment Fund (PIF).

Mohamed Abu Basha

Mostafa El Bakly