Kingdom's Fiscal Deficit Shows Yearly Decline

by shariff mohammed | Oct 01, 2017

The latest quarterly budget performance report by the Ministry of Finance (MoF) showed a continued improvement in Saudi Arabia’s fiscal position. Due to an increase in government revenue, by 6 percent, and a drop in expenses by 1 percent, year-on-year, the fiscal deficit declined to SR46.5 billion in Q2 2017, compared to SR58 billion a year ago. Continued yearly improvements in oil revenue helped lift overall government revenue in Q2 2017. At the same time, total non-oil revenue decreased by 17 percent year-on-year, with all but one segment -‘Taxes on Income’, showing yearly declines, according to Jadwa Research.

Kingdom's total government expenses dropped by 1 percent year-on-year in Q2 2017. This was largely a result of a drop in capital expenditure, which fell by 12 percent year-on-year, whereas current expenditure rose by 1 percent year-on-year. Looking ahead, we do expect to see a significant ramp up in government capital spending in H2 2017, similar to the pattern observed in H2 2016. That said, the risk of lower than forecasted oil prices could result in budgeted capital spending coming in lower than our forecasted SR260 billion, for 2017 as a whole. Year-on-year improvements in non-oil revenue following the introduction of an excise tax on harmful products is also expected, higher expat levies and dependent fees, and a rise in seasonal investment income.

Saudi government revenue totaled SR164 billion in Q2 2017, up 6 percent year-on-year. The vast majority of this rise was due to improvements in oil revenue as a result of higher yearly oil prices. Despite higher oil prices, the Kingdom’s strict adherence to OPEC agreement cuts resulted in lower oil and refined products exports, compared to a year ago. Jadwa estimates that the Saudi export price of crude and refined products increased by 18 percent year-on-year, to $51 per barrel (pb) in Q2 2017. At the same time, due to lower output in accordance with the OPEC agreement, provisional Q2 2017 data shows that Saudi oil and refined products exports dropped by around 6 percent, or close to 500 thousand barrels per day (tbpd) in Q2 2017 year-on-year. Accordingly, the Kingdom saw oil export revenue rise by 11 percent, or SR13 billion, year-on-year. Looking ahead, we expect oil export revenue to show only mild improvements on a yearly basis in Q3 2017. Whilst Brent oil prices are currently above $50 pb, compared to around $45 pb during the same period last year, continued adherence to OPEC cuts by the Kingdom will result in lower volumes of oil and refined product exports, ensuring modest rises in oil revenue.

Total non-oil revenue in Q2 2017 decreased by 17 percent year-on-year, with all but one segment -‘Taxes on income etc.’-showing yearly decreases. ‘Taxes on income etc.’ were up by 30 percent year-on-year in Q2 2017. Since there were no specific changes in tax to justify the sizable yearly increase, we believe a part of this rise could be due to a result of a general improvement in the collection process on behalf of government. Specifically, in the first quarter of 2016 the Saudi General Authority for Zakat and Tax (GAZT), the organization responsible for the collection of such taxes, introduced a new online filing system, but some technical issues pushed the collection of the revenue back to later quarters. Meanwhile, ‘Taxes on Trade and Transactions’ were down by a sizable 44 percent year-on-year. The decline likely reflects not only a general reduction in the level of imports during Q2 2017, but also an adjustment in the importation of products with higher customs tax, following an expiration of duties on 193 products, at the beginning of the year.

According to the MoF, a one-off item related to the privatization of assets, the details of which were not specified, boosted last year’s second quarter ‘Other Revenue’. As a result, a sharp decline in this segment, by 23 percent, was recorded in Q2 2017 year-on-year. Looking ahead, the seasonal nature of dividends from TASI listed companies means that Q3 2017 ‘Other Revenue’ is likely to be higher on a quarter-on-quarter basis. For example, most companies within the two largest Tadawul All Share Index (TASI) sectors, petrochemicals and banking, pay dividends on a semi-annual basis. However, due to lags in financial results reporting, these payments are likely show up as investment income in both the first and third quarters of the year. That said, as a result of drop in FX reserves by $37 billion in foreign securities since mid-year 2017, SAMA’s investment returns are likely to be lower and, as a result, limit the extent of yearly rises in ‘Other Revenue’.

Total government expenses dropped by 1 percent year-on-year in Q2 2017, to a total of SR210 billion. Current expenditure, the non-growth element of government spending, was up 1 percent year-on-year. The largest contributor to current expenses, ‘Compensation of Employees’ was flat year-on-year in Q2 2017, following a year-on-year reduction of 5 percent in the previous quarter. The rise on a quarter-on-quarter basis was most likely due to allowances of public sectors workers being reinstated following a Royal decree in April 2017, although the previously installed wage freeze was kept in place. The ‘Compensation of Employees’ segment represents the most rigid aspect of government expenditure and is therefore likely to remain at around current levels in the forthcoming quarters.
Lower expenditures on ‘Goods and Services’ reflects a general cut back in government procurements and projects, in tandem with cost rationalizing and operational efficiency targets set out in the National Transformation Plan (NTP) 2020 and Saudi Vision 2030. This point was reiterated by the Minister of Finance earlier this year, stating that the Bureau of Capital and Operational Spending Rationalization (BCOSR) had succeeded in saving up to SR17 billion for the whole of 2017, after reviewing state projects and other expenditures. Such savings and rationalizations are also likely to account for the reduction in ‘Subsidies’ segment in expenditures . Generally speaking, it is important to note that the deflationary trend seen in the Kingdom since the start of the year also contributed to reducing some costs outlined above.

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