Saudi Arabia’s fiscal surplus forecast at SR162bn by 2020

Saudi Arabia’s fiscal surplus forecast at SR162bn by 2020


JEDDAH/RIYADH — By the year 2020, planned fiscal measures under the Saudi government’s Fiscal Balance Program (FBP 2020), will result in the government saving around SR362 billion, leading to a fiscal surplus of SR162 billion, compared with a deficit of SR200 billion if no reforms are implemented. Our forecast differs slightly from the baseline scenario presented in the FBP. This difference is mainly due to our belief that oil revenue will be slightly higher than what the government is expecting, Jadwa Investment said in its Fiscal Balance Program 2020 report.

Jadwa forecast that oil revenue will reach SR586 billion by 2020, compared to SR520 billion implied in FBP’s baseline scenario, noting that its “assumptions with regards to growth in expenditure and non-oil revenue are close to the targets in the FBP’s baseline scenario.”

The report also estimates that FBP initiatives will result in SR100 billion worth of gross savings in 2017 alone. The reduction in public sector worker allowances and wage freeze will contribute to 55 percent of 2017 gross savings. A further 29 percent of these savings will come from energy price reform – whilst new measures to enhance the efficiency of spending and raise non-oil revenue will contribute 12 percent and 4 percent, respectively. That being said, “we believe that the government has already incorporated these savings into the 2017 budget, and therefore are confident of government delivering on reforms. These initiatives will help in keeping total government spending in an expansionary mode from 2018 to 2020, as an expansionary fiscal policy across three different scenarios is highlighted in the FBP document.”

The FBP also touches on critical socioeconomic aspects, such as the creation of a “Household Allowance Program”, which aims to safeguard vulnerable low and mid income households from the negative impact of energy price reform. This program will eventually develop into the “Unified Citizen’s Account Program”, a comprehensive platform acting as a social safety net for a more efficient determination of the real needs of eligible households, Jadwa said.

The FBP’s other major focus is on supporting overall growth in the economy. This will be achieved through the recently established ‘Local Content and Private Sector Development Unit’. This unit will take charge of providing stimulus to the private sector, creating a framework for local content development, and ensuring that specific economic sectors are promoted.

The FBP reemphasizes several economic targets which were highlighted in both Vision 2030 and NTP 2020. These include raising the share of non-oil private sector GDP from 38.8 percent of GDP to 65 percent by 2030. Another target sets to raise non-oil exports’ share of non-oil GDP from 13 percent in 2015 to 50 percent by 2030.

A short-term target aims to increase the local content share of expenditures from 36 percent to 50 percent by 2020.

According to the FBP, one of the key lessons that were learned following the study stage of the Kingdom’s historical fiscal performance was that government expenditure should be less responsive to oil revenues. In the period between 1999 and 2016, the Kingdom overspent its budget in each year, averaging 22.2 percent higher than budgeted expenditure.

As a response, the government had established the Bureau of Capital and Operational Spending Rationalization Unit.

The unit is charged with identifying opportunities for optimization of efficiency in both current and capital spending.

Measures to control current spending include improving the efficiency of government contracting, leveraging economies of scale for procurement, and optimizing the consumption of utilities.

The FBP estimates SR70 billion in cumulate savings between 2017 and 2020 as a result of such measures, representing 1.9 percent of cumulative total expenditure under the baseline fiscal target up to 2020. Capital spending is also targeted for significant savings.

According to the FBP, total outstanding cost of public capital projects stood at SR1.4 trillion as of 2016, of which SR220 billion, belonging to five ministries, was under review. The government was able to reduce this cost by SR100 billion as a result of applying global best practices. If the government is able to achieve similar optimization results for the remaining SR1.2 trillion in outstanding projects, it would mean a significant preservation of fiscal buffers, and would allow for a significant increase in growth-enhancing capital spending.

The report noted that the optimization measures are being applied to projects which are least in line with the Vision 2030. This rationalization is necessary for reaching the Kingdom’s strategic objectives.

Moreover, Jadwa said the FBP presents multiple efficiency enablers that could contribute to achieving the efficiency targets highlighted above. Enablers include having policies to enable key global best practices, benchmarking relevant costs, integrating planning of capacity and demand across entities, along with other critical enablers.

Besides. an expansion of the expenditure rationalization measures will include all public entities.

Jadwa also forecast the government is planning to increase nonoil revenue from SR199 billion in 2016 to SR321 billion by 2020. This planned increase in non-oil revenue will have direct implications on the performance of the Kingdom’s non-oil private sector, as additional costs are likely to impact growth.

A detailed socioeconomic understanding of the impact of such measures on households is also highly important, which is why the government is launching the Household Allowance Program and its SR200 billion private sector incentive package. In addition to targeted incentives, “we believe the government will simultaneously improve both spending efficiency and fiscal transparency in a bid to improve overall public sector accountability. This should also minimize any negative outcomes stemming from raising additional revenue from the private sector and households,” Jadwa said.

Taking the total expenditure targets from the FBP 2020 document, non-oil revenue will rise as percentage of total expenditure from 21.4 percent in 2016 to 33.6 percent by 2020, thereby contributing to lowering fiscal exposures to oil price swings.

That said, the non-oil revenue share still represents a lower amount compared to an average of 70 to 100 percent of other G20 countries expenditures. This means that the fee and tax base should remain relatively attractive for businesses and investors to operate in the Kingdom come 2020.

Jadwa further anticipated that a significant share of non-oil revenue growth will come from non-tax sources, primarily investment income, as the Public Investment Fund (PIF) expands its portfolio, both domestically and abroad, to seek higher returns on non-oil investment. This should result in non-oil revenue rising from 11.1 percent of non-oil GDP to 14.4 percent by 2020. — SG