Fiscal consolidation continues at the expense of growth

Saudi Arabia released its 2Q17 fiscal balances, showing the deficit narrowing 20% Y-o-Y driven by 28% Y-o-Y growth in oil revenues and a 1% decline in expenditure. The numbers continue to reflect Saudi’s poor economic growth outlook as fiscal consolidation continues to be sought at the expense of growth. Indeed, wages continued to contract (albeit at a slower pace of 0.4% Y-o-Y versus 5% in 1Q17 as the reinstatement of allowance kicked-in in the latter part of the quarter), spending on goods and services fell 39% Y-o-Y and investment declined 12% Y-o-Y. We expect these poor growth dynamics to persist in 2H17 with recently approved fiscal measures weighing on consumer sentiment and purchasing power, while weak oil prices might drive the government to make further spending cuts.
 
Non-oil revenues decline is key disappointment, but expect a pick-up in 2H17

 
A 17% Y-o-Y contraction in non-oil revenues was probably the key disappointment in the released numbers given the importance the government has put on boosting these revenues. Customs revenues plunged 44% Y-o-Y in 2Q17, largely reflecting a weak economic backdrop, while other revenues (mostly comprised of dividends from SAMA and PIF) fell 23% Y-o-Y. Non-oil revenue’s share in total revenues also fell to 31% in 1H17 vs. 45% a year earlier though it remains well above pre-2016 levels. While generally a disappointment, we expect this situation to reverse in 2H17 as new revenue-increasing measures, including excise taxes and expat levy, kick in. Moreover, we expect larger contributions from state-owned institutions to the budget, in the form of revenues, especially in 4Q to shore up non-oil revenues.
 
Heading for a narrower deficit in 2017; but quality remains key focus for us

1H17’s deficit of SAR73bn represents only 37% of the budgeted deficit of SAR198bn for the year, indicating there is a good chance the budget deficit may come in lower than budgeted. This is especially the case when taking into account that higher spending in 2H17 (whether due to reinstatement of allowances or a typical acceleration of investment spending towards end of the year) is likely to be mitigated by higher non-oil revenue as clarified above. The key risk for the deficit remains oil prices, in our view, with 1H17 revenues representing 44% of 2017 target. As such, we believe authorities may have to look at additional spending rationalisation in 2H17 to ensure a narrower fiscal deficit. The quality of the narrower deficit, however, remains a concern to us given the rising role of dividends from state-owned institutions.
 

Mohamed Abu Basha