An expansionary budget with focus on diversification

December 20, 2017

Saudi Gazette report

— The Saudi general budget 2018 announced on Tuesday continues to support the overarching goals of the Vision 2030, with a strong focus on supporting economic diversification, shielding economically vulnerable households from necessary energy price reforms, and spending on key physical and social infrastructure, according Jadwa Investment.

“We expect an improvement in the economy in the year ahead, supported by the oil and non-oil sector,” it said, adding,

“Oil sector GDP is expected to exhibit some modest improvements as oil production rises as OPEC and non-OPEC countries gradually exiting from cuts. Growth in the non-oil sector is forecast to improve as the expansionary budget, with a specific set of stimulus packages, lift activity.”

The government continues to support the economy through the largest ever budgeted expenditure of SR978 billion in 2018, compared with 2017’s budget of SR890 billion.

The government has budgeted for non-oil revenue to reach SR291 billion in 2018, showing a strong growth of 37 percent and 14 percent over 2017’s budgeted and actual figures, respectively.

Rises in non-oil revenue will come from a number of areas, including rises in expat dependent fees and the introduction of expat levies, the introduction of VAT, receipts from white land tax, and from improvements in investment income due to the PIF active approach in managing sovereign wealth.

“Taking the above risks into consideration, we see government expenditure for 2018 as being sufficient to continue supporting positive growth in the non-oil sector.

“In addition, the targeted stimulus package focusing on SMEs, housing, construction and export growth, amongst others, will particularly be growth-enhancing to the private sector,” the Jadwa report said.

The budget also disclosed revenue and expense projections to 2023, thereby updating the previous Fiscal Balance Program (FBP).

The newer version of the FBP shows oil revenues are set to decrease as a proportion of total revenue, from 58 percent in 2017, to 42 percent by 2023.

This of course means that non-oil revenues will make up 58 percent of revenue in 2023.

On the expenditure side, the Kingdom is expected to see an expansionary budget stance until 2023, with an average annual increase in budgeted spending by 3 percent between 2018-2023, reaching SR1.34 trillion in spending come 2023.

However the budget statement also stated that the debt to GDP ratio would not be allowed to exceed 25 percent over the balancing phase which, according to our calculations, means the Kingdom has room to accumulate approximately SR800 billion debt in total by 2023.

An NCB report also said the Saudi economy is expected to grow by around 2% in 2018 in which the main driver will be the non-oil sector that is expected to expand by a significant 3.6% on the back of the announced budgetary pro-growth measures.

“We do believe that extending the timeline for adjusting energy subsides towards 2025 and announcing myriad investment schemes came at a critical junction to avoid negative spillovers on the economy,” NCB said.

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