Saudi fiscal policy seen to continue in H2: Al Rajhi Capital

Saudi Arabia’s higher-than-expected oil revenue and the implementation of reforms are successfully driving the transformation of the economy, Al Rajhi Capital said in a report on Thursday.

“We see expansionary fiscal policy continuing throughout H2 2018 on the back of higher non-oil revenues and higher than expected oil revenues for the year,” it said.

The government is expected to meet or exceed 2018 spending targets without compromising the budget deficit target. Q2 2018 budget deficit of SAR 7.4 billion implies that the government is in the right direction to achieve the target, the report said.

Fiscal deficit in H1 stood at SAR 41.7 billion, a sharp improvement from the government’s projection of SAR 195 billion.

Revenues came in at SAR 440 billion, a 43 percent year-on-year (YoY) increase driven by higher oil and non-oil revenues, which rose 40 percent YoY and 49 percent YoY, respectively.

Spending in H1 dropped 49 percent from the annual target.

Depsite a 34 percent YoY increase in oil prices, and likely lower exports, oil revenues jumped 82 percent YoY in Q2, due to a switch in Aramco’s expected quarterly dividends for the quarter. “We expect this to normalize next quarter,” the research form said.

Non-oil revenue in Q2 rose by 42 percent YoY, helped by successful reforms such as the imposition of the value-added tax (VAT), expatriate levy, selective tax and zakat collections.

Out of the total target expenditure of SAR 978 billion for the year, the Kingdom spent SAR 481 billion so far, mainly in terms of employees’ compensations, social benefits and subsidies.

The budget deficit for H1 was funded by both external and internal debt. Internal debt stood at only SAR 12 billion in Q2.

The average oil price in Q2 was $66.4 per barrel, up 33.6 percent YoY.

In July, oil price averaged $70.6 per barrel, while it reached $ 67.7 per barrel this month.

Al Rajhi Capital expects $76 per barrel as the budget breakeven price, which differs from the International Monetary Fund’s (IMF) forecast of $88/barrel. The difference is due to capex estimates.