Analysts expect Saudi fiscal deficit to shrink in 2018: survey

With 2017 winding down, analysts expect Saudi Arabia— which will release its 2018 budget tomorrow— to post an average fiscal deficit of SAR 196 billion for the current year, ahead of shrinking to SAR 161 billion in 2018.

Most analysts agreed that the deficit decline will be attributed to the Kingdom’s reforms that will likely reflect more positively next year. They added that the Kingdom would adopt a more expansionary budget in 2018, capitalizing on revenue from the measures aimed to control spending and the recent anti-corruption purge.

Based on average analyst estimates, revenue is projected to grow by 30 percent to SAR 674 billion this year, compared to actual revenue in 2016. Expenditure is likely to rise 5 percent to SAR 871 billion compared to the actual figure last year.

Here’s what analysts had to say:

1) Krisjanis Krustins, associate director at Fitch Ratings, said a potential decline in the 2017 fiscal deficit will be attributed to higher oil prices and government procedures that helped curb the deficit. Saudi Arabia is forecast to see narrower deficit over the next years, thanks to higher government revenue. Krustins added that higher government revenue would be generated from the value-added tax (VAT) introduction, expat fees and further energy reforms, which will show in 2018 and 2019.

2) Turki Fadaak, head of research at Albilad Capital, said a budget deficit will be slightly higher than expected, due to a rise in actual spending. Meanwhile, OPEC output cuts will reduce revenue, despite the rise in average oil prices in H2 2017. Fadaak added that 2017 saw an efficient mix of domestic and foreign debt instruments, a policy which had no impact on market liquidity, compared to 2016, when domestic debt instruments tightened liquidity. He also expects higher government revenue in 2018, on VAT application, introduction of new fees and taxes, and redirection of government support to eligible Saudi citizens.

3) Abdullah Baeshen, chairman of TeamOne Consulting, said this year’s fiscal policies will narrow the deficit. Baeshen added that a crackdown on corruption is likely to boost spending efficiency, along with the launch of the Citizen’s Account program and VAT implementation.

4) Mazen Al-Sudairi, head of research at Al Rajhi Capital, echoed that sentiment regarding widespread corruption crackdown taking place in the Kingdom, VAT implementation, as well as the Citizens Account Program. He added that these policies will help improve efficiency in the country.

5) Hans-Peter Huber, Chief Investment officer at Riyad Capital, expects the Saudi market to show a positive response to the new budget announcement. The 2018 budget will provide a clear outlook for the Saudi fiscal policy and show the pace of the fiscal consolidation program, he said. Reforms will see a slower pace across the Kingdom, with the introduction of VAT and expat workers fees, he added.

6) Ketaki Sharma, founder & chief executive officer of Algorithm Research, expects budget deficit to narrow in 2018, on higher revenue due to VAT implementation, despite a partial increase in the current expenses with the launch of the Citizen’s Account scheme. Saudi Arabia is likely to apply other taxes in the years to come, driven by its focus on revenue growth and diversification in 2018, he added. Sharma said that the VAT application and energy subsidy cuts will improve economic forecasts in the medium term, but hinder consumption growth in the short term. Consumption is projected to be bolstered by the recently-launched private sector stimulus package and the Citizen’s Account scheme.