Oil prices, reforms boost Saudi finances

In the first nine months of 2018, the kingdom cut its budget deficit 60% from the same period the year before.
Sunday 11/11/2018
Flames at the production facility of Aramco’s Shaybah oilfield in the Empty Quarter. (Reuters)
Striking benefits. Flames at the production facility of Aramco’s Shaybah oilfield in the Empty Quarter. (Reuters)

Higher oil prices, fiscal reforms and focused efforts to strengthen the kingdom’s non-oil sector are allowing Saudi Arabia to reap striking economic benefits. Typical conservative budget calculations by Riyadh contributed to impressive savings that the government of Saudi King Salman bin Abdulaziz Al Saud reported.

Data released October 31 by the Saudi Finance Ministry indicate that, in the first nine months of 2018, the kingdom cut its budget deficit 60% from the same period the year before, down to $13 billion from $32 billion.

In its third-quarter budget report, the ministry credited the steep reduction to impressive growth in oil and non-oil revenues, reflecting “the effectiveness of economic reforms and fiscal measures targeting fiscal sustainability as well as the effective management of public finances.”

The ministry reported a 47% jump in government revenues in the first three quarters of 2018, compared to the same period in 2017, to around $177 billion. This year’s third quarter pulled in revenues of about $59.4 billion, a 57% increase from third quarter 2017.

Non-oil revenues were up 45% to $18.5 billion compared to the same period in 2017. In addition, non-oil income grew 48% from the first nine months of 2017 to the same period this year, welcome news given that the non-oil sector is to be the driver of the Saudi economy in the coming years, as seen in the ambitious fiscal overhaul programme known as Saudi Vision 2030.

The kingdom’s 2018 budget has benefited from higher oil prices. Oil revenue pumped $41 billion into state coffers in the third quarter of the year, up 63% from the same 2017 quarter. Prices for the US benchmark crude West Texas Intermediate and European benchmark crude Brent averaged around 45% higher during the third quarter of 2018 compared to the same period last year.

Official data indicated that Saudi government spending for the first nine months of 2018 totalled nearly $190 billion, up 25% from the same period last year. The increase was attributed to the Citizens Account benefits system, living allowances and infrastructure expenditures.

The Citizens Account programme was introduced in late 2017 to provide monthly payments to lower- and middle-income families to mitigate the effects of fiscal reforms Riyadh enacted, including energy-related subsidy cuts and the introduction of the 5% value added tax that went into effect January 1, as well as a previously implemented “sin tax” on tobacco products, soft drinks and energy drinks in 2018.

The Citizens Account programme benefits approximately 10.6 million people, nearly half the kingdom’s population. The government expected to make $8.5 billion in Citizens Account payments this year.

The 2018 Saudi budget, released last December, was record-breaking, projecting expenditures of more than $261 billion, plus another $30 billion of spending to be pulled from the kingdom’s sovereign wealth fund and national development fund. It forecast $209 billion in revenues and a budget deficit of $52 billion. The Finance Ministry recently indicated that the actual 2018 deficit would be closer to $39.5 billion.

The fact that the Saudi government traditionally bases its budgets on conservative oil price estimates has proven a savvy move. Speculation was that Riyadh built its 2018 budget assuming Brent crude prices would average $51-$55 per barrel for the year. However, oil prices have risen substantially even as Saudi Arabia and other producers ramped up output.

The US Energy Information Administration recently revised its estimate for the spot price of Brent crude for 2018 to $73 a barrel, $20 a barrel more than the Saudi government’s oil price projection for this year’s budget.

In a September 30 pre-budget briefing, the Finance Ministry said the Saudi government planned to increase spending 7% in 2019 to $295 billion, with revenues forecast at $261 billion. That would result in a deficit of $34 billion, 4.1% of GDP.

Saudi Finance Minister Mohammed al-Jadaan said 2019 budget expenditures would focus on growth and job creation, with new policies supporting the public sector in areas such as industry and tourism to be unveiled soon. The minister said the government was committed to eliminating budget shortfalls over the next few years and that the preliminary 2019 budget “is yet another step in cutting deficits gradually in the medium term, until we rebalance the budget entirely by 2023.”

The pre-budget briefing was the first by the Finance Ministry and was considered an effort by Riyadh to make Saudi fiscal policy more transparent.