Fiscal Balance in Saudi Arabia

Saudi Arabia - Fiscal Balance

Government unveils an expansionary budget for 2019 despite the recent fall in oil prices

On 18 December Saudi Arabia presented its budget for 2019, which is the Kingdom’s largest ever in a bid to spur faltering economic growth. Despite the media-grabbing Saudi Vision 2030—intended to diversify the economy away from oil—the Saudi economy is still heavy reliant on state-funded activity, which mostly comes from oil revenue. Moreover, foreign investment remains low and the unemployment rate among Saudis continued to climb in the first half of 2018, despite the implementation of the Saudization scheme, an initiative to force companies to hire Saudis.

The government plans to increase total spending by 7.3% to a record high of SAR 1.1 trillion (USD 295 billion) this year, despite the recent decline in oil prices. The increase will be mostly driven by a 20.0% increase in capital expenditure, while current expenditure will rise a modest 4.2%. Although the 2019 budget does not include a reduction in Saudi Arabia’s lavish subsidy system, it entails a sizeable reduction in military spending despite Saudi Arabia’s significant involvement in the conflict in neighboring Yemen. Finally, unlike in preceding years, authorities did not include details about the planned off-budget spending by the Public Investment Fund, Saudi’s main sovereign wealth fund, suggesting that investment could be even higher.

Government revenues are expected to jump 9.0% this year, leaving a fiscal gap of 4.2% of GDP (2018: deficit of 4.6% of GDP). Analysts warn that the increase in oil revenues could be on the optimistic side as the implied oil price assumption for the 2019 budget is around USD 70 (Q4: USD 56.5), threatening to derail the government’s consolidation efforts. The budget also includes an increase in non-oil revenues mainly due to higher expat levies. The public debt is expected to rise from 19.1% of GDP in 2018 to 21.7% of GDP in 2019.

The Saudi government presented a budget intended to shore up growth amid sluggish economic conditions, especially in the private sector. Although projected revenues appear to be optimistic, the government considers that the current drop in oil prices will be temporary and that the planned oil production cut (effective January 2019) will prop up crude oil prices going forward. While the increase in capital expenditure is good news for the economy, there are doubts about the pace of execution of the investment projects.

FocusEconomics panelists project the fiscal deficit to reach 4.2% in 2019. Next year, the fiscal deficit is forecasted to increase to 4.8%.