Saudi Arabia Unveils Its 2018 Budget: Economists’ Reaction

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Saudi Arabia released its second budget since unveiling proposals to reduce the kingdom’s dependence on oil. Here economists comment on the numbers, prospects for crude prices and the direction of government policy.

  • Monica Malik, chief economist at Abu Dhabi Commercial Bank: “This budget is trying to support economic growth rather than just focus on fiscal austerity and reducing the deficit, which was the case in the past few years. The increase in oil price gives them some fiscal space.”
    “Saudi Arabia still has to show some fiscal consolidation to the international bond holders and rating agencies.
    “The non-oil revenue, especially the tax revenue, looks optimistic especially since we think non-oil activity will not see the same boost as projected in the budget. In fact, we think there could be a moderate decrease in real non-oil GDP growth with the introduction of VAT and the increase in electricity prices.”
  • Mohamed Abu Basha, Cairo-based economist at EFG-Hermes: “Generally the economy will remain under pressure at least in the first half due to the inflationary impact of the reform measures and uncertainty” about the extent of compensation from the Citizen Account program to help needy Saudis.
    “Next year we should see a bigger role for state funds, led by the PIF,and going forward these funds will be playing a bigger role in setting total public investment spending.”
  • Jason Tuvey, London-based economist at Capital Economics: “There is a modest loosening of fiscal policy next year, but it’s not massive by any means.
    “The five-year plan to bring back the budget into balance suggests that there will continue to be little space to provide significant support for the economy over the coming years, particularly if oil prices remain near their current levels.”
  • Jan Dehn, head of research at Ashmore Group Plc, which holds $65 billion emerging-market assets, including Saudi dollar debt: “Saudi Arabia can afford this budget. They have a very low debt-to-GDP ratio. They have the room to do it. It also shows signs that the crown prince’s reforms are going to go ahead.
    “The gradual rolling back of the state and the liberalization of prices are good things.
    “We’re looking at a country that seems to be opening up more and more for investors and liberalizing.”
  • Charles Robertson, the global chief economist at Renaissance Capital Ltd. in London: “What they are continuing to progressively do is to reduce the enormous budget deficit that was 16 to 17 percent to GDP in 2015 to 2016. They are not doing so aggressively because it can bring the economy to a halt. They are cutting the budget deficit but issuing new debt at the same time to basically manage the process. And to ease the transition from a high oil price to lower oil price, they’re still presumably spending to diversify their economy, which will be problematic for them.”
  • Inan Demir, an economist at Nomura Plc in London: “This is in line with the slower deficit reduction path for which Saudi authorities received the IMF blessing during the annual meetings in October. With domestic political concerns more prominent recently, it is understandable that the authorities prioritize growth over rapid fiscal consolidation.”
  • Jaap Meijer, head of equity research at Arqaam Capital Ltd. in Dubai: “It seems that Saudi is able to prop up the economy by spending more. The spending number is good. Oil prices are up, which means there is fiscal space to support the non-oil GDP. That is pretty relevant since the anti-corruption drive, which could have ramifications for GDP growth. So that was of paramount importance to get spending up to stimulate the economy.
    “The fiscal deficit target looks high given the spending. I think they can undershoot the deficit. Revenues will be a bit higher than what they have penciled in. The spending is ahead of our expectations. It is enough to surprise the market definitely. You could expect a positive response from the market.”
  • Hasnain Malik, head of equities research at Exotix Partners LLP Dubai: “Higher oil prices allow for more of a balance between cutting the deficit and priming the pump for growth. The budget should be seen in that context.
    “There won’t be a more significant expansion in public spending until oil prices are higher and Saudi is not shouldering the burden of production cuts.”
  • Ayham Kamel, head of the Middle East and North Africa at Eurasia Group: “The political transition road map is also of critical importance to the economy as there’s sensitivity to public perception of the reform vision. The IMF earlier this year gave the authorities a green light to moderate spending cuts.”
  • Emad Mostaque, London-based co-chief investment officer of emerging-markets hedge fund Capricorn Fund Managers Ltd: “Saudi will continue to tap the international debt capital markets for a similar magnitude of fundraising in 2018 despite the lower deficit. The local capital markets in the kingdom will also continue to develop rapidly to support economic diversification, including aggressive stock and bond issuance.”

— With assistance by Arif Sharif, Paul Wallace, Selcuk Gokoluk, and Archana Narayanan

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