Friday 20 April 2018
 
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ANALYSIS

Expansionary policy to sustain going forward,
backed by non-oil revenue growth

Non-oil revenue to back Saudi Arabia budget for 2018

RIYADH, December 20, 2017

Revenue streams such as VAT, expat levy and taxes on energy/soft drinks/ tobacco, other fees and some asset sales will drive growth in Saudi Arabia’s non-oil revenue supporting the kingdom’s SR926 billion ($261 billion) for 2018, a report said.

The government maintained an expansionary policy, both for 2017 (SR926 billion) billion estimate) as well as 2018 (SR978 billion estimate, up 5.6 per cent year-on-year (y-o-y); and SR1,110 billion including PIF and National Development Funds spending), added Al Rajhi Capital, a leading financial services provider in Saudi Arabia, in its strategy report titled “Saudi Arabia Budget 2018”.

The government’s willingness to ease the purse strings was also reflected in higher 2017 fiscal deficit of SR230 billion (8.9 per cent of GDP) vs. SR198 billion (7.2 per cent of GDP) estimate.

Further, 2018 fiscal deficit is projected at SR195 billion, down only by 15 per cent y-o-y. Going forward, oil revenue (SR492 billion in 2018, up 11.8 per cent y-o-y) will have tailwinds from energy price reforms and likely better oil prices (Opec+ agreement recently extended) over the next few years.

In-line with NTP and Vision 2030, non-oil revenue is witnessing sharp uptick, increasing 29 per cent y-o-y in 2017 to SR256 billion (much higher than SR212 billion est.) and is further projected to rise 14 per cent in 2018 to SR291 billion.

Expansionary policy supported by non-oil revenue growth and PIF, NDF spending:

The headroom created by both, higher oil and non-oil revenue, will be augmented by PIF spending (SR82 billion in 2018) and NDF spending (SR50 billion in 2018), that is set to increase over the next few years.

This will result in (1) expansionary policy (increased budgetary spending in absolute terms) sustaining for the next few years, and (2) fiscal deficits getting progressively lower. The shift in focus to higher government spending (fiscal breakeven now expected to be achieved in 2023 vs. 2020 earlier) along with PIF & NDF spending will drive capex recovery in our view.

Along with the recently announced SR72 billion stimulus package for the private sector (focused on subsidized housing, technology, exports, and SMEs), the higher spending should drive a rebound in 2018 real GDP growth (2.7 per cent estimate vs. -0.5 per cent in 2017). Overall, the budget is well placed to tackle the unemployment, energy efficiency and housing challenges.

What does it mean for investors?

There are two key trends that are playing out: (1) Disposable incomes coming under increased stress in the short term, due to the many reforms taking effect i.e. VAT, expat levy, selective taxes and fee hikes, electricity price hikes likely followed by energy/ water price hikes, and (2) Higher fiscal spending going forward, as mentioned above.

“In this environment, we believe that investors should stick to secular and scalable consumer stories (mainly due to their long term potential), but will do well to pay attention to the sectors that are sensitive to increase in capital spending such as corporate banks, cement, real estate, construction and building materials,” said Al Rajhi in the report.

“We also believe higher government spending will likely translate to receivables hangover easing for the Healthcare and Building/ construction companies. The government confirmed that all the dues to private sector have been cleared during 2017.” – TradeArabia News Service




Tags: Al Rajhi | Non-oil revenue |

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