JEDDAH — Saudi Arabia’s non-oil activity is likely to pick up going forward, the latest Bank of America Merrill Lynch’s Global Emerging Markets Weekly report revealed.

The 1Q19 fiscal balance stood at a surplus of SR27.8 billion ($7.4 billion; 0.9% of GDP), with the primary balance registering a surplus of SR32.2 billion ($8.6 billion; 1.1% of GDP). This is due to an increase in Saudi Aramco special dividends to the budget; non-oil revenues broadly on target; and, seasonality and control of spending.

Saudi Aramco's increase in dividend payments (74%yoy) in 1Q19 brought annualized oil revenues on track to exceed the budget target. Oil revenues stood at SR169 billion ($45.1 billion) in 1Q19, up 6% qoq and 48% yoy. This is despite lower oil production and prices qoq. Some oil revenues to the budget may accrue with a quarter lag. However, to stay in line with the full-year budget oil revenue target, dividend payments would need to remain at this level, or crude oil production and prices may need to increase further.

The increase in oil revenues in the budget reflects the Saudi Aramco disbursement in March of SR124 billion ($33 billion; 4.1% of GDP) in quarterly dividends. This comprises SR48 billion ($13 billion) in ordinary dividends and SR75 billion ($20 billion) in special dividends.

In comparison, in 1Q18, Saudi Aramco dividend payments to the government totaled SR71 billion ($19 billion; 2.4% of GDP). This consisted of SR15 billion ($4 billion) and SR56 billion ($15 billion) in dividends, approved and paid in January and March 2018. Saudi Aramco paid a total of SR217.5 billion ($58 billion; 7.4% of GDP) in cash dividends to the government over 2018. This suggests that a third of the total dividend payments were made in 1Q18, which may imply that further quarterly dividend payments in 2019 could be smaller in size, all things being equal, the report noted.

Ongoing fiscal reforms and possible one-off revenues are keeping non-oil revenues on track. Non-oil revenues stood at SR76 billion in 1Q19, down 8.4% qoq but up 46% yoy. The base effects reflect the one-off inclusion in 2018 non-oil revenues of SR50 billion in cash collected in settlements from the government's anti-corruption probe.

The report further indicated that budget over-financing in 1Q19 reduces the risk of over-reliance on international debt markets to finance deficits over 2019.

Despite the 1Q19 budget surplus, authorities raised SR28 billion ($7.5 billion) in external bonds and SR22.5 billion ($6.0 billion) in domestic bonds. This suggests that the fiscal balance swung to a surplus of SR27.8 billion ($7.4 billion; 0.9% of GDP) by end-1Q19 thanks to Saudi Aramco dividends.

The partial use in 1Q19 of the proceeds of the January external bond issuance suggests that the remainder of the proceeds ($5.1 billion) may have still not been repatriated. They could be used for budget financing over the remainder of 2019. The timing of the USD dividend payment of Saudi Aramco could explain the increase in government deposits in SAMA (SR51 billion; $13.7 billion) and SAMA Fx reserves (SR56 billion; $14.9 billion) in March.

Moreover, mega-projects provide growth upside from 2020 onwards, the report added.

“The possible finalization of the Saudi Aramco-Sabic-PIF deal could unlock $69.1 billion of financing to the PIF. This could support a first phase of mega-projects. Authorities suggest the transaction would close in 2020, implying the growth impact of PIF's off-budget capital spending could start to be felt next year.” — SG