Saudi Arabia makes strides in fiscal management



Saudi Arabia, which overhauled its public finances and embarked on major economic reforms a few years ago, is on track to achieve major milestones in fiscal management over the next few years according to economists at the Institute of International Finance (IIF).

We are encouraged by the improvement made in expenditure management, including major reduction in fuel subsidies and streamlining of inefficient capital expenditures, said Garbis Iradian, chief economist for Middle East and North Africa at IIF.

Gasoline prices are now being adjusted quarterly in line with international benchmark prices.

The recent reforms to strengthen government procurement have helped to improve the efficiency of public spending.

According to the IIF the fiscal trajectory is much more secure than a few months ago given the efforts underway to rein in spending, and assuming that oil prices remain slightly above $60 per barrel. However, significantly lower oil prices than assumed in our baseline scenario would lead to large deficits, causing the government debt-to-GDP to exceed 40 per cent by 2023.

Preliminary estimates by the authorities put actual spending in 2019 at 1.048 trillion riyals (Dh1.02 trillion), well below the budgeted 1.106 trillion. While defence spending exceeded slightly the budgeted amount due to the ongoing Yemen war, this was more than offset by lower capital expenditures. The IIF has revised fiscal deficit estimates downward for 2019 from 6.2 per cent to 4.7 per cent of GDP.

We have also lowered our forecast for the fiscal deficit for 2020 from 7.5 per cent of GDP to 6.6 per cent in 2020. This still represents a widening compared with 2019 due to lower oil revenues. The 2020 budget announced on December 9, sets expenditures at 1.02 trillion, which is 2.7 per cent lower than the preliminary estimates for 2019, said Iradian.

The IIF estimates Brent oil price of $77 per barrel to balance the budget for 2020, compared to $80 per barrel in 2019. While the government is expected to continue tapping foreign debt sources at very competitive rates to finance the fiscal deficits, authorities are committed to keeping the public debt-to-GDP ratio below 30 per over the medium-term, but this could be challenging, particularly if oil prices decline well below $60 per barrel.

The Kingdom’s public debt has risen from 6 per cent of GDP in 2015 to 23 per cent of GDP in 2019. If government expenditure continues to decline modestly through 2023, as highlighted in the kingdom’s medium-term fiscal framework, and if oil prices remain slightly above $60 per barrel, then the debt to GDP would stay below 30 per cent by 2023.

To keep public debt below 30 per cent of GDP, additional expenditure cuts and non-oil revenue measures would be required if oil prices fall significantly be-low $60 per barrel in the next few years. An early resolution of the conflict in Yemen could remove some pressure on the budget and bring achievement of fiscal targets closer in reach.

Despite a tighter budget in 2020, the IIF economists expect non-oil real GDP growth to remain solid at 2.7 per cent in 2020 driven by further recovery in private sector activity, which will be supported by interest rate cuts. Latest data showed the purchasing managers’ index (PMI) rose to 58.6 in November (the highest in four years), and point of sale transactions, a proxy for retail sales, continue to expand.

Credit data also showed credit growth picked up to 3.5 per cent year on year in October 2019, with a recovery in lending for construction and manufacturing.

We expect overall real GDP to shift from a contraction of 0.3 per cent in 2019 to a growth of 1.9 per cent in 2020, as crude oil production is projected to increase slightly. The contraction in 2019 is mainly due to the decline in crude oil production of 4.5 per cent in the context of Opec+ agreement and the September attack on Aramco’s oil facilities, said Iradian.

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