Historic Saudi Budget Shows Effort to Win Support for Change

  • Budget gap seen dropping 33% to 198 billion riyals in 2017
  • Austerity plans include total liberalization of fuel prices

Saudi Arabia Releases 2017 Budget

Saudi officials presented the most detailed budget in the country’s history in an effort to convince citizens and investors that they’re serious about a plan to repair the deficit and wean the economy off oil.

Dozens of pages and slides presented in an hours-long press conference laid out different scenarios for how public finances, battered after two years of low oil prices, could evolve through 2020. The government said it reduced spending by 16 percent this year and narrowed its budget deficit by more than expected. It forecasts the shortfall will drop again next year as revenue improves, and may even turn to a surplus as early as 2019 in its most optimistic scenario.

While some analysts welcomed the unprecedented detail, others reacted with skepticism, casting doubt on the credibility of figures and pointing out that the government’s efforts to balance its budget over the next four years still rely on rising oil prices. The announcements also reflected the headwinds facing the biggest Arab economy, in which the majority of citizens work in the public sector and Saudi companies rely on inexpensive foreign workers. The non-oil economy barely grew this year, with private sector expansion under 1 percent.

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“While there is a real desire among senior officials to address structural problems, the budget reveals the government’s willingness to use higher projected crude export revenues to drive growth through expansionary spending,” Crispin Hawes, London-based managing director at Teneo Intelligence, said in an e-mail. “In relative terms, oil revenues will remain the dominant line in fiscal accounts for the foreseeable future.”

The plans are a culmination of a year that saw the biggest economic overhaul in Saudi history, as Deputy Crown Prince Mohammed bin Salman, the son of King Salman, charted out a strategy to end the kingdom’s “addiction” to oil. Even though Brent crude rebounded this year to about $55 a barrel, it’s 35 percent below its 10-year average. In one of the boldest steps announced, Energy Minister Khalid Al-Falih said the cost of fuel and electricity will be linked to global prices within four years.

‘Tough Conditions’

In April the 31-year-old deputy crown prince outlined a vision for a more innovative and diverse economy.
In April the 31-year-old deputy crown prince outlined a vision for a more innovative and diverse economy.
Photographer: /Getty Images

The budget “comes during tough economic conditions in most countries, which included slow economic growth and low oil prices that left an impact on our country," King Salman said in a speech.

Three ministers and two other senior officials who took to the stage at a large auditorium in Riyadh showed no signs of reneging on plans to move away from a government-led economic model that it can no longer afford to sustain.

2017 Challenge

“The budget is still clearly reliant on oil and oil-related revenue, but it does show pleasing growth in non-oil revenue,” Emad Mostaque, a London-based strategist at emerging-markets consultancy Eclectic Strategy, said in an e-mail. “Most of the low-hanging non-oil revenue has now been tapped, 2017 will mark the year when we need to see the underlying economy kick on and create the hundreds of thousands of jobs the next generation of Saudis need.”
The budget figures unveiled on Thursday included, for the first time, projections for where revenue and spending is headed in the next four years and the state’s military spending. The kingdom said it would allocate 7 percent less to defense next year even as it continues to lead a coalition fighting rebels in Yemen.

For more on what’s in the 2017 budget, 2016 results, click here.

Saudi citizens have started coming to terms with how the Saudi Vision 2030 plan will affect their lives. Bonus payments for state employees were canceled and ministers’ salaries were slashed by 20 percent in September. The government started raising the price of fuel at the end of last year, including an increase in the price of gasoline by a minimum of 50 percent. Value-added taxes will be introduced in 2018 and the kingdom will start imposing some fees on expatriate workers.

Payouts

To lessen the blow on the lower-income citizens in the country of 31 million people, Saudis will be able to apply to a 25-billion-riyals ($6.7 billion) fund for cash payments to help them cope with lower subsidies, Deputy Labor and Social Development Minister Ahmed al-Humaidan said. The program will increase in size to 60 billion riyals by 2020.

After tightening its purse strings in 2016, the kingdom will increase spending next year to help spur economic growth that at 1.4 percent this year was the slowest since a recession in 2009. Even so, it sees the budget deficit narrowing to 7.7 percent of gross domestic product from 11.5 percent this year.

The country will rely more on foreign investors to finance the fiscal gap. After raising a record $17.5 billion in its first-ever bond sale in October, the kingdom is planning to issue $10 billion to $15 billion of international bonds in 2017, Deputy Economy Minister Mohammad Al Tuwaijri said in an interview with Arabiya TV.

“The 2017 budget shows a shift from deep retrenchment and austerity to one that is focused on supporting critical areas of growth in the economy,’’ said Monica Malik, the chief economist at Abu Dhabi Commercial Bank. "The expansionary stance would give the economy a breather, but in the long term there will be a need for further fiscal reforms to reduce the deficit.”

Skepticism

Some economists cast a critical eye on the budget figures -- particularly that there were two figures for expenditures, including a higher sum with payments rolled over from previous years that would make total spending 11 percent higher at 930 billion riyals. That figure would mean Saudi Arabia overspent its budget target.

“In our analysis we don’t exclude payments made during the year regardless of when those payments were due,” said James Reeve, the London-based deputy chief economist at Samba Financial Group, who estimates the fiscal shortfall was 19.5 percent of GDP this year.

David Butter, an associate fellow at Chatham House in London, said the “critical target of moving toward a more balance budget and to increase non-oil revenue isn’t really there. In the 2017 budget the increase in non-oil revenue is pretty modest at only 7 percent.”

The government’s fiscal predictions show it’s preparing for oil prices to stay relatively depressed -- rising to $66 a barrel in 2020 in it’s most optimistic scenario cited by Saudi-owned Al Arabiya -- compared with the heydays of the past decade when they surpassed $100 a barrel. Still, if all goes according to plan, Saudi Arabia will post a small budget surplus of 20 billion riyals in 2019.

For more on the government’s scenarios, click here.

Non-oil revenue is already becoming more important to finances, with its ratio to total earnings climbing to 38 percent in 2016. Just a few years ago, crude comprised upwards of 90 percent of state income.

“The objective of reaching a balanced budget goes through a lot of work. We look at oil revenue and we stress test it against a lot of scenarios,” Finance Minister Mohammed al-Jadaan said in an interview. “We want to make sure that we are very disciplined.”

— With assistance by Mahmoud Habboush, Dana Khraiche, and Alaa Shahine

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