Off-budget investments will drive Saudi non-oil sector growth: BofAML

Saudi Arabia’s 2018 budget is expansionary as austerity pace eases and reforms continue, despite revised medium-targets, Bank of America Merrill Lynch (BofAML) said in a new report.

The Kingdom’s non-oil sector growth is likely to increase by two percentage points if the off-budget mega-investment initiatives are realized over 2018, it added.

On Tuesday, Crown Prince Mohammed bin Salman said the Kingdom’s total expenditure is likely to exceed SAR 1.1 trillion in 2018, which will include an estimated SAR 978 billion in public spending along with an off-budget spending of SAR 83 billion from the Public Investment Fund (PIF) and SAR50 billion by the National Development Fund.

The 2018 state budget, the biggest ever in its history despite lower oil prices, expects revenues of SAR 783 billion and the projected deficit at SAR 195 billion. The government projects real GDP growth of 2.7 percent in 2018 with a robust expansion of 3.7 percent in the non-hydrocarbon sector.

In its latest report, BofAML said it maintains conservative growth assumptions due to uncertainties linked to the impact of the anti-corruption probe on the private sector, the breakdown of the stimulus package, and the funding and timing of off-budget mega-projects.

“In contrast, we see real GDP growth of 1.3 percent, with non-hydrocarbon real GDP growth not exceeding 2 percent,” it said.

In 2017, real GDP contracted by 0.5 percent as the real hydrocarbon sector GDP contracted by 4.3 percent and non-hydrocarbon real GDP growth stood at 1.5 percent.

According to BofAML, the government fiscal impulse may remain modest, adding the primary non-hydrocarbon balance is likely to stay flat at -25.8 percent over 2017-18, from -30.7 percent in 2016.

“This reflects the fact that higher primary expenditures are being partly funded from higher non-oil fiscal revenues (VAT, expatriate fee) which act as a drag on domestic liquidity and activity,” the bank said.

It also estimated that the government expenditure would increase by 8.5 percent to SAR 1 trillion in 2018 (2.8 percent increase in real terms), which would push non-oil real GDP growth up by 0.4 percentage point all else being equal.

The planned increase in government spending is of mixed nature, with the estimated bulk of the increase representing the start of the household allowance program (SAR 32 billion), higher capex (SAR 25 billion) and potentially the stimulus package (SAR 24 billion).

According to BofAML, the $500 billion NEOM project is likely to be developed over 2019-2025, while the Red Sea tourism project and the Qiddiya entertainment may be developed in phases partly extending over 2017-2022.

“However, funding for the mega-projects remains unclear as of now, particularly as the PIF may require proceeds from Saudi Aramco's potential IPO to invest domestically,” it added.

Meanwhile, Saudi Arabia’s energy policy is likely to remain focused on supporting the oil market rebalancing and enabling the government's shift to boost growth near-term, which will make the OPEC’s June 2018 meeting key.

“The 2018 budgeted revenue numbers would be consistent with our estimates with an internally budgeted oil price assumption of $60 per barrel and oil production at 9.9 million barrels per day. The budget itself would breakeven at $85 per barrel on our spending assumptions. This is $5 per barrel higher than 2017 but $10 per barrel lower than 2016 levels,” BofAML said.

The push to balance the budget by 2023 instead of 2020 represents a deviation of SAR 141 billion (5.5 percent of GDP) from the previously planned fiscal trajectory to 2020, stemming from both higher expenditures and lower revenues, the bank noted.