Tuesday, January 23, 2018 /9:59AM /Fitch
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.
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.
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.
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.
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.
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
affirmed Saudi Arabia's 'A+'/Stable sovereign rating on 2 November 2017.
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