Fitch upgraded its rating on the Government of Egypt by one notch to B+ on 21 March, one notch higher than S&P and two higher than Moody's.
Saudi Government Budget for 2017: Analysis and Statistics
The Saudi budget for 2017 is projecting expenditure of $237bn during 2017, a little less than the headline figure for actual expenditure in 2016. Revenues are expected to increase by 30% to $185bn, largely due to changes in the way the government manages oil and gas sales internally. As a result, the Kingdom's deficit is projected to fall to $52bn, about half the actual deficit recorded last year.
As always, considerable care has to be taken with the budget figures. Actual figures disclosed at the end of the year usually differ significantly from budgeted figures announced at the beginning. That said, the differences between budget and actual were less noticable in 2016 than in previous years: the actual budget deficit of $107bn in 2016 compares to a budgeted deficit of $87bn and all of that difference can be attributed to spending related to prior years (for example, payments during 2016 that were due in 2015). Excluding items related to prior years, spending was a little below the budgeted amount: $220bn compared to the $224bn budgeted).
A comparison of budgeted and actual figures from 2012 to 2016 is attached as Table 1 below. The full budget statement from the Ministry of Finance is also attached below.
Oil revenues will increase as domestic subsidies are cut
Oil revenues accounted for 62% of total revenues in 2016. They are budgeted to rise to 69% in 2017 because oil revenues are expected to increase by a greater amount than non-oil revenues. The Saudi Ministry of Finance's Budget Statement says that, "The increase in projected revenues and expenditure is primarily due to the energy pricing reform programm, although this will be partially offset by the allowances for those citizens who need government support." Translating, this means that as the government reduces domestic subsidies on oil products its revenues from selling such products will increase, but this will be offset by increased welfare payments to compensate the economicaly most vulnerable sectors of society.
The budget statement does not say what the Ministry's assumptions on oil prices are.
No big changes to expenditure
The budget statement breaks projected expenditure of $237bn into nine items. The largest are "Education" with $53.4bn and "Military" with $50.9bn. Spending on "Health and Social Development" is put at $32.1bn and "Security and Regional Adminstration" at $25.8bn. None of these budget items differ greatly from the amounts budgeted in 2016, or the actual outcomes for 2016.
The budget statement specifically mentions the expansion of the Grand Mosque in Mecca and infrastructure related to it (such as roads, and transport stations) as a key project for 2017.
$71bn has been allocated to cover the costs of the National Transition Programme up until 2020. During 2016, $2.4bn was spent and in 2017, $11.2 is budgeted to be spent.
Balancing the budget by 2020
The Kingdom's medium term financial strategy aims to balance the government's budget by 2020. This is to be achieved by "increasing non-oil revenues, benefitting from efficiency savings on expenditures and ensuring fiscal discipline."
Non-Oil Revenues have been growing by 19% per year
Increasing non-oil revenues has been a key budgetary priority for many years (although the 2017 budget statement shows that oil revenues remain a significant source of addition revenue, even without any increase in global oil prices: reducing the amounts spent on oil/gas related domestic subsidies will bring big gains to the budget.)
What non-oil revenues supposedly offer is stable income, in contrast to volatile oil income, most of which will continue to be determined by global oil prices. Non-oil income has accounted for a much greater proportion of the revenues in recent years, but this is largely due to a fall in oil revenues. Nontheless, non-oil revenues have been increasing in absolute terms, from $22.2bn in 2011 to $53bn in 2016, a compound average growth rate of 19%. If this growth rate continues, the non-oil revenues will amount to $106bn in 2020.
These figures are shown in more detail in table 2 below.
National Debt Stands at $84.4bn - about 13% of GDP.
The budget statement provides useful information on the Kingdom's current level of indebtedness and its plans for raising more debt in the years ahead.
Total national debt at the end of 2016 is put at $84.4bn, of which $56.9 is due domestically and $27.5bn is due internationally. This is about 13% of GDP. Debt servicing cost $5.4bn in 2016 and is expected to cost $9.3bn in 2017. The budget statement correctly points out that this is a very low level of indebtedness for a government. It says that national debt will not rise above 30% of GDP – repeating a commitment that was made in the Propsectus for the government's international bond issue in October 2016.
The Kingdom plans to issue more debt both locally and internationally, in the form of conventional debt and Islamic sukuk.
Aiming for Aa2 credit ratings.
Another feature of the Kingdom's debt strategy will be to achieve a credit rating of Aa2, the budget statement says. This is ambitious. Following several rating downgrades over the last two years, the Kingdom now holds a Aa3 rating from Fitch and an A+ from Moody's while S&P has it four notches below Aa2 at A-. Saudi officials are probably hoping that signs of better fiscal management, the prospect of structural economic change contained in the Vision 2030 and the national Transition Plan, combined with higher oil prices, will enable it to regain Aa ratings. Presumably the Kingdom's rating adivsors are focussing their efforts on Moody's in the hope of a single notch upgrade. This would allow the Ministry of Finance to claim AA-rating status from two of the three agencies and dismiss S&P's ratings as a maverik opinion. But moving up from A- to Aa2 will be a long journey, even if oil prices do recover.
Ambitious targets for Ficsal Reform and Economic Development
The Saudi Government has set itself ambitious targets for economic development and fiscal reform. Central to economic development will be the Council of Economic and Development Affairs (CEDA) which was created in 2016 with a mandate to establish the systems and processes necessary to implement the government's Vision 2030 and to monitor progress. CEDA has created a number of enabling bodies that are tasked with pushing forward particular aspects of Vision 2030. These include the National Center for Performance Measurement, the Spending Rationalisation Office, the Non-Oil Development Unit, and the Delivery Unit.
Within the Ministry of Finance, there has also been a lot of activity, such as the creation of the General Fiscal Unit, enhanced review of budgets for capital projects, rationalisation of spending by government agencies, efforts to move state finance from a cash system to an accruals system, and much more.
All of this is exactly what the Kingdom needs to be doing if it is to put its economy and government finances, on a more sustainable basis. The question is whether the government has the administrative capacity to implment these ambitious plans.
Many Important Developments during 2016
The 2017 Budget caps a momentous year for the Saudi economy and its fiscal system. Developments during 2016 included:
In April, the government raised a $10bn five year loan from international banks. This was the Kingdom's first international debt issuance for 25 years.
In May, major changes were made to the Saudi cabinet. As part of this, Khalid al-Falih became Minister of the newly-expanded Ministry of Energy, Industry and Miniral Wealth, replacing Ali Naimi who had been Minister of Oil since 1995. At the same time, Majid al-Qasabi became Minister of the newly expanded Ministry of Commerce and Investment, replacing Tawfiq al-Rabiyah, who had been Minister of Commerce, and was moved to become Minister of Health.
Also as part of these changes, Ahmed al-Kholeify was appointed Governor of the Saudi Arabian Monetary Agency, replacing Fahad al-Mubarak. Al-Mubarak had been Governor since 2011. Al-Kholeify had previously been Deputy Governor for Research and International Affairs.
In September, the government injected SR20bn ($5.3bn) into local banks via deposits from state-run companies. SAMA introduced 7-day and 28-day repurchase agreements, and in October introduced 90-day repurchase agreements. (Previously only overnight repos had been offerred.) The aim of these measures was to ease banks' liquidity which had been squeezed by continuing low oil prices. At the same time, SAMA announced that it would reduce its weekly debt issuance to SR3bn from SR9bn.
In October, the Kingdom of Saudi Arabia raised $17.5bn through its first international bond issue.
In November, Mohammed al-Jadaan replaced Ibrahim al-Assaf as Minister of Finance. Al-Assaf had been Finance Minister since 1996. Al-Jadaan had been Chairman of the Capital Market Authority, where he had overseen the partial opening of the Saudi stock exchange to qualified foreign investors. Before that, he had been a commercial lawyer.
Those interested in the Saudi economy may be interested to read two articles previously posted on this website: "Saudi Bond Road Show Shines Light on Saudi Economy" about the October 2016 sovereign bond issue; and Saudi Arabia's Vision 2030: Key Points. Both can be seen by scolling down the Banking News Tab on our website.
Attached below are:
Table 1: A comparison of budgets and actual figures since 2012
Table 2: Figures on non-oil income
Table 3: Figures on Saudi crude oil production, exports and revenues
A copy of the Saudi Ministry of Finance's Budget Statement for 2017.
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