Kamco, the Kuwait-based investment manager and research house, has published some excellent reports on the performance of GCC capital markets during 2108. Our Editor has summarised the key point with some tables, and provides links to the original reports for those who would like more details.
Saudi Budget for 2018 continues the drive for economic reform
The Saudi government budget for 2018 is projecting a deficit of $52bn, which is the same it budgeted for 2017 and 15% lower than the actual outcome of $61bn.
Revenues are projected to rise by 12% compared to the actual outcome in 2017, and expenditures are expected to rise by only 6% compared to the actual 2017 outcome.
The budget's medium term projections show that the Saudi government remains committed to its ambitious goals to balance its budget over the medium term, and to significantly increase its non-oil revenues. The Ministry of Finance's Budget Statement also references the huge expansion of the Kingdom's administrative infrastructure as it tries to move towards more robust budget planning and oversight.
The full Budget Statement is presented below.
The Arab Bankers Association's Editor in Chief, Andrew Cunningham, has reviewed the Ministry of Finance's Budget Statement and presents the following analysis.
The 2018 Budget Figures
The Ministry of Finance is projecting a budget deficit of $52bn for 2018 which is almost exactly the same as the budgeted deficit for last year. The actual deficit for last year was $61bn.
The 2017 deficit was equivalent to 8.9% of GDP, compared 12.8% of GDP for the 2016 deficit.
Revenues are projected to be $209bn in 2018, up 12% on last year. Tax revenues are expected to rise by 17% but they will still account for only 18% of total revenues. Revenues from oil and gas sales account for nearly all of other revenue.
Expenditures are budgeted at $261bn, 10% higher than last year's budget, and 6% ahead of actual expenditures during 2017. The government payroll of $117bn accounts for 54% of projected expenditure. If achieved, this will be almost exactly the same as actual expenditure in 2017. 'Social benefits' will increase to $17bn, 48% ahead of the actual outcome in 2017. Operating expenditure is budgeted to be 79% of total expenditure.
Table 1 below shows Actual and Budgeted figures for revenues and expenditures since 2102. The table also gives the average price of Brent crude oil for those years. It is clear that the price of oil is the key factor determining actual government revenues, but it is interesting to compare the actual figures for 2015 and 2017, since the average price of oil was almost the same in both those years. In 2015, the deficit was $105bn, but last year it was only $61bn as a result of reduced spending and increased revenue (which presumably arose from higher non-oil income). Crude oil production averaged 9.9 mn b/d in 2017, a little lower than the 10.2 mn b/d seen in 2015. Assuming that there there have been no significant changes to the way in which budget figures are calculated, this ability to run a much smaller deficit with the same oil price is a very positive development.
Military and Security Spending Remain High
The Budget Statement gives a breakdown of budgeted expenditure by sector. (Table 2 reproduces this, with some notes.) Military spending continues to be the largest item, accounting for 21% of the total. Security and Regional Administration accounts for 10%. Spending on both is budgeted to fall in 2018 compared to actual spending in 2017. Perhaps surprisingly, spending on education is projected to fall by 15.8%, the largest decrease of any sector. Spending under this item includes building costs, for example of new schools, as well as recurring costs such as salaries, so it is possible that lower spending results from the completion of capital projects, but the Budget Statement offers no explanation.
Spending on Economic Resources and Public Programmes will more than double, to $28b. This item includes many of the projects related to implementing Vision 2030. The Budget Statement focuses in particular on the plans to expand drinking water and sewerage networks.
Medium term budget projections
The Kingdom's two medium term budgetary objectives are to reduce dependence on oil revenues (by increasing non-oil revenues such as taxes) and to balance the budget. The 2018 Budget Statement provides a forecast for how the Ministry of Finance hopes this will happen, with the budget being balanced in 2023. Table 3, below, shows the Ministry's forecasts.
Revenues are projected to rise to $303.5bn in 2023, compared to $185.6bn in 2017, an increase of 63%. Expenditures are projected to rise by only 22%.
The projected increase in revenues assumes a compound average growth rate of 8.5%. At first glance, this hardly seems an ambitious target, but one must remember that oil and gas revenues currently account for more than 80% of total revenues. Even if tax revenues were to increase by 20% per year over the six years to 2023, the Kingdom would still be running a substantial deficit if oil revenues do not also increase.
(A simple 'back of the envelope' calculation shows that if tax revenues increased by 20% every year until 2023, the budget deficit would be $43bn in 2023 – similar to current levels – if other revenues and projected expenditure remain unchanged.)
It is clear that the Kingdom's ability to achieve its medium term fiscal goals will continue depend on oil prices, however successful efforts to increase tax revenues may be.
Nonetheless, increasing non-oil revenues is important: whatever its mathematical significance, raising non-oil revenues is a central part of the government's economic strategy – so success will be an indication of the government's ability to execute difficult policy measures; and it is also a central plank of the government's broader social agenda, through which it hopes to make citizens more accountable for the resources that they use and to promote more sustainable lifestyles.
The Budget Statement highlights three key initiatives that will generate revenue in the short term, as well as, "encouraging competition and/or improving social behaviour (reducing excessive consumption or the consumption of harmful substances)."
An Expat Levy has been introduced with effect from 1 January 2018, imposing on companies a monthly fee of SR300 ($80) for each expatriate employed in companies where the number of expatriates is less than the number of Saudis, or SR400 per month when expatriates outnumber Saudis. These fees are due to be increased by SR200 per year. A levy of SR100 on expatriate dependents was introduced in Juy 2017. This levy is due to increase by SR100 year year.
(To get a sense how much revenue this might raise, suppose that there are 7.5mn working expatriates in the Kingdom (a realistic estimate based on recent official Saudi labour statistics), and that half of these work in the private sector and are subject to the levy. If companies pay an Expat Levy of SR350 per month (the average of the two rates), the revenue raised in 2018 will be $4.2bn, and it would be $6.6bn in 2019, assuming the SR200 annual increase.
Value Added Tax of 5% has been introduced with effect from 1 January 2015. A recent research paper from Sico, the Bahrain-based investment bank, esimates that this could raise $6bn.
An Excise Tax is being introduced on commodites such as soft drinks and tobacco with the aim of promoting "sensible consumption" as well as raising revenue.
The Budget Statement identifies Energy Price Reform as "the most important element of the fiscal balance programme." This entails aligning prices of petroleum products with market prices, and so increasing the revenues raised by the companies that sell such products, many of which are owned by the Saudi government. This is a complex programme which is due to be completed in 2025. Alignment with market prices will not only be gradual but also "targeted" to limit the short term impact on certain consumers, while requiring others to pay the full price sooner.
A large number of other intiatives are planned with the aim of increasing economic activity and efficiency. Inevitably, there is a focus improving small and medium size enterprises' access to finance (which every government in the region seems to believe holds the key to higher private sector employment and greater economic dynamism), but the programme also has initiatives to help people buy more efficient air conditioning units (so reducing their energy consumption), to faciliate house purchases, and to stimulate investment in broadband. Nineteen such initiatives are mentioned (including the Energy Price Reform plans) and this does raise the question of whether the Kingdom has the institutional capacity to implement all these plans effectively.
Debt raising during 2017
The Budget Statement summarises the three debt-raising initiatives undertaken by the Saudi government in 2017.
- In April, the government raised $9bn through an international sukuk offering, with maturities in 2022 and 2027.
- In July, the government initiated a domestic sukuk issuance programme. There were four issues off the programme in 2017, raising SR54bn ($14.4bn) with maturities of five, seven and ten years.
- In September, the government raised $12.5bn through a second international bond issue, with maturities in 2023, 2028 and 2047.
The government used around SR100bn (SR26.7bn) of government deposits and reserves as part of its deficit finance programme.
The Budget Statement says that public debt was expected to be SR438bn ($116.8bn) at the end of 2017, representing 17% of GDP compared to SR317bn ($84.5bn) at the end of 2016, representing 13.1% of GDP.
The budget statement says that Saudi nominal GDP rose by 6.1% in 2017 as a result of higher oil prices. The current account surplus is expected to be 2.5% of GDP. The value of exports rose by 26% in the first nine monhts of 2017, compared to the first nine months of 2016. Non-oil exports increased by 4.2% over the same period.
The cost of living index is expected to have fallen by 0.1% in 2017, compared to a rise of 3.5% in 2016.
The unemployment rate for Saudis was 12.8% at the end of June 2017.
Bank credit fell by 1.5% year-on-year to the end of September 2017. This was partly due to a 7.7% fall in credit to the construction and building sector and an 8% fall in credit to manufacturing and production. Real estate loans have been increasing, partly due to subsidised housing loans.
In itself, the 2018 budget is unremarkable, but it is consistent with the Saudi government's long-term amibtions to transform the Kingdom both economically and socially.
The broad lines of this transforation were set out in its Vision 2030, published in April 2016 and led by Crown Prince Mohammed bin Salman (who at the time was Deputy Crown Prince). Vision 2030 was followed in June 2016 by the National Transformation Plan (NTP), a road map for implementing Vision 2030.
Vision 2030 aims to reduce Saudi dependence on oil exports, but its scope extends much more widely, addressing social issues such as women's participation in the workforce and the development of leisure and entertainment opportunities. Both Vision 2030 and the NTP are eminently sensible in their objectives, but they are also extremely ambitious in what they are seeking to achieve. Vision 2030 addressed 33 different areas for improvement, and created 13 new government programmes. But the lack of realism in such outsized ambitions may not matter. They show the direction in which the Crown Prince wants to lead the country; and implementing only a fraction of the objectives in Vision 2030 will entail a signficant re-ordering of the Saudi economy and society.
The 2018 budget continues the Vision 2030 narrative, inter alia, in its medium term projection for a balanced budget, its spending on women's colleges, its investment in renewable and more efficent energy, and in the excise taxes designed to incentivise healthy lifestyles.
The Budget Statement also illustrates the Kingdom's efforts to strengthen its administrative infrastructure. It refers to the recent creation of the Macro and Fiscal Policies Unit, the Debt Management Office, and the Non-oil Revenue Development Unit; and to the incorporation under the Ministry of Finance of three previously existing bodies, the Capital and Operational Expenditure Rationalisation Office, the Strategic Procurement Unit and the Fiscal Balance Office. Reference is also made to the establishment of the Bureau of Spending Realisation Office and the Strategic Procurement Unit.
As with the 19 'initiatives' to direct government spending to SMEs and other sectors, the question still to be answered is whether these government units and departments will result in sustained changes to the way the government of Saudi Arabia is run. The signs are promising, but it is far too early to reach firm conclusions.
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