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Saudi Arabia Economics: Plain budget announcement reflects challenging oil price environment

2019 budget – The facts

Saudi Arabia’s 2019 budget announced yesterday carried a few surprises, coming almost identical to the preliminary budget announced in October. Spending is set to increase 7% Y-o-Y to SAR1,106bn, driven mostly by a 20% increase in capital spending, while revenues are set to grow 9% Y-o-Y to SAR975bn, driven equally by oil and non-oil revenues. As a result, the deficit is projected to narrow slightly (4% Y-o-Y) to SAR131bn, or 4.2% of GDP. On a sectoral basis, the government is planning to increase spending on infrastructure, power and water, while scaling back spending on education and security. We estimate the budget was set at no less than a cUSD60-65/b oil price assumption, assuming 7.2mn barrels of oil exports a day – though it is difficult to assess, given that the budget statement pointed out that this revenue includes higher revenue from potential subsidy cuts, but did not give further information. We note that, according to the budget programme published last year, the government is supposed to increase the prices of kerosene and petroleum gas for households in 2019 to match some unnamed benchmarks. Finally, we note that the budget carried an important accounting amendment, according to the statement, whereby SAR23bn of revenues from some state entities were added to the 2019 budget and were also included in expenditure, thereby having a neutral impact on the budget.
Budget only mildly expansionary

Considering the accounting treatment mentioned above, this actually means that the like-for-like spending is set to increase only 5% Y-o-Y in 2019. This implies a conservative fiscal stance, which comes as no surprise, in our view, given the recent sharp correction in oil prices. Indeed, the budget details show the government reducing spending on wages and social benefits by 4% and 3%, respectively, in 2019, with the statement providing no reasons behind the decline. In addition, the fact that the budget was identical to the preliminary budget announced in October, in a way, shows the limited capacity/willingness of the government to push for additional spending to boost economic growth.
Double-digit growth in capex is a bright spot; pace of execution remains a challenge

The government is planning a 20% Y-o-Y increase in capital spending in 2019 – with the increase falling to 17.5% Y-o-Y if the new accounting treatment highlighted above is included. While this is encouraging, especially after revised figures showed that capital spending fell 1% Y-o-Y in 2018, we foresee challenges of realising such ambitious investment spending. As in the previous year, when the government announced an aggressive capex plan, we do not see much evidence in the project award cycle that gives us comfort that such pace of spending can take place at least before mid-2019. Project awards were largely flat Y-o-Y in 2018 at USD24bn, with still no sign of a near-term contract award of the major projects linked to the Public Investment Fund. Unlike last year, the budget announcement did not provide any details on PIF’s 2019 investment plans and follow-up on 2018’s budget.
Still looking for faster non-oil GDP growth, but we are not excited

Even though the budget has a largely neutral fiscal stance, we continue to forecast an acceleration of non-oil GDP growth to 2.7% in 2019 from an expected 2.2% in 2018. We see the higher growth rate will be driven by some pick-up in consumption, largely marking normalisation of consumption trends in the absence of any major fiscal reforms for the first time in the past three years. This should also be supported by the King’s decision to extend the inflation allowance for public sector employees and pensioners for another year with a total cost of SAR42bn (1.3% of GDP). Moreover, higher capital spending, in the range of 5-10%, will also provide some marginal support to economic activity. We see risks to our forecasts, however, largely tilted to the downside in light of the challenging oil price environment and limited capacity to increase capital spending over the short term.

Mohamed Abu Basha