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Saudi Fiscal Reform Progresses But Framework Incomplete

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Tuesday, January 23, 2018 /9:59AM /Fitch Ratings 


Recent fiscal measures in Saudi Arabia will raise government revenues sustainably, but spending increases highlight that commitment to consolidation is constrained by the desire to support economic growth, Fitch Ratings says. The credibility of the Kingdom's fiscal framework, including new spending control mechanisms announced in the updated Fiscal Balance Programme published in December 2017, is still limited. 

The Saudi government recently raised fuel prices (following an initial rise two years ago), increased expat levies (after introducing fees for expats' dependents in July 2017) and introduced value-added tax. These measures are largely in line with earlier commitments. They contribute to a forecast 1.0% of GDP rise in non-oil revenues in the 2018 budget, released in December. 

However, the budget projects this will largely be offset by a 0.8% of GDP increase in spending, including measures to compensate poorer households for rising utility and fuel costs. The ratio of the non-oil deficit to non-oil GDP will fall only marginally, to 36.6%, according to our calculations. 

The budget nonetheless forecasts the central government fiscal deficit to narrow to 7.3% of GDP in 2018 from 8.9% of GDP in 2017 (the 2017 budget target was 7.7%).This will be driven by a 1.6% of GDP rise in oil revenues, which in 2017 still accounted for 63% of total government revenues. Revenues in 2018 may also get a one-off boost from settlements with wealthy individuals following the anti-corruption campaign launched in November, although the value and use of the receipts has not been officially confirmed and they are not included in official budget projections. 

The limited progress on underlying fiscal consolidation reflects a greater focus on GDP growth targets, which the government explicitly mentioned as the reason for pushing back the year for achieving a balanced budget to 2023 from 2020. This is more realistic than earlier targets. However, the emphasis on growth, combined with a focus on mega projects of uncertain long-term impact and other extra-budgetary spending financed through the Public Investment Fund and National Development Fund, could undermine progress on improving the non-oil fiscal position in the medium term. 

The government highlighted its commitment to medium-term fiscal planning and spending ceilings in the Fiscal Balance Programme. However, its announcement of a one-year household stimulus programme in early January undermines confidence in this framework, although the impact on the deficit is likely to be offset by additional one-off revenue. We estimate this stimulus will cost around 2% of GDP, effectively breaching the expenditure ceilings only weeks after they were introduced. Weak commitment to the ceilings suggests recent progress on fiscal discipline could still evaporate in response to the current period of higher oil prices. 

We affirmed Saudi Arabia's 'A+'/Stable sovereign rating on 2 November 2017. 

Proshare Nigeria Pvt. Ltd.

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