Saudi Arabia on economic rise?

Saudi Finance Minister Mohammed al-Jadaan

Saudi Arabia announced its budget and other financial data for 2018, which demonstrates the government’s great optimism for its economic diversification and expansion plans. The data also show that even if the government’s plans fall short, the country is in a stable financial situation.

As Forbes writes in an article "Saudi Arabia's 2018 Budget Is The Country's Largest Ever", the financial information released today provides a vision for the ongoing economic transformation of the Middle East and hints about where oil prices and energy equities are headed. The announced budget is about $261 billion, which is slightly higher than Saudi Arabia’s 2017 budget of $250 billion. Saudi Arabia projects it will bring in about $209 billion in revenue in 2018. The large budget, coupled with projections of a balance in only six years, indicates that Saudi Arabia is expecting significant revenue growth in the years to come.

Saudi Arabia’s budget is 1/15 the size of the U.S. budget even though its population is about 1/10 the size of the U.S. population. Nevertheless, the Saudi budget is quite large in the grand scheme of budgets. Only six European countries (not counting Russia) have larger budgets than Saudi Arabia , and this budget is approximately the size of the combined budgets of California and Florida.

After the price of oil dropped from highs above $100 per barrel in 2014, Saudi Arabia began an austerity plan. Government ministries were instructed to cut spending on contracts by 5% in 2016, but by mid-2017 it seemed that Saudi Arabia was heading towards a recession. With the 2018 budget, the government is reversing its strategy and recommitting to investing in the future. This could be good news for the Saudi equity market which had a lackluster 2017.

At the same time, however, some austerity measures will continue—for instance, the government will no longer subsidize gasoline as much as it previously did. The price of fuel in Saudi Arabia is set rise by 80% in January 2018. Increasing fuel costs can often slow economic growth, but in this case gasoline prices were so low—about $10 for a full tank of gasoline—it seems the government believes Saudis will continue to consume at higher rates. Also, as part of this new fiscal strategy, Saudi Arabia—which never collected personal income taxes—is implementing new fees and taxes, most notably a value added tax.

The real question and the real reason that Saudi financial projections should interest outsiders is: Where does the Saudi Arabia see this huge revenue growth to balance the growing budget in 2023 coming from? The possible answers include 1) higher oil prices, 2) higher tax/fee rates to increase revenue and 3) a diversified economy and revenue source.

1. Higher oil prices would help Aramco’s bottom line, but Aramco’s tax rate was just cut from 85% to 50% last year so higher Aramco profits would be less influential on Saudi revenue than they once were.

2. The kingdom is trying to bring in more revenue through new taxes and fees, including a VAT, extra fees on expats working in the kingdom and potential additional costs imposed on foreign businesses. However, new taxes and fees are not likely to increase revenue so much without also stalling economic growth or worse.

3. It seems clear the kingdom is actually relying on plans for economic diversification to increase the revenue and build its coffers. The kingdom expects non-oil GDP growth to be 3.7% next year, which may be more aspirational than realistic. In 2017, the kingdom’s non-oil sector grew by 1.5%. While 3.7% growth is certainly not outside the realm of possibility, it seems very optimistic to base policy on this degree of growth in sectors of the economy that are still underdevelopment and far behind the kingdom’s oil and petrochemicals sector. On the other hand, the non-oil sectors are at a low baseline so there is certainly plenty of room for growth. This is why developing countries often have very high growth rates and similarly developing industries in Saudi Arabia have very high growth potential.

Saudi Arabia is still planning to run a deficit in 2018 but one that will be smaller than in 2017. Moreover, the country claims to have about $48 billion in foreign reserves, which is money sitting in the treasury. This indicates a strong financial position in a world in which it is typical for industrialized nations to be in debt (meaning negatives on the balance sheet). While Saudi Arabia does hold debt, its net treasury is positive . This is also another sign that those who claim Saudi Arabia needs high oil prices (such as the IMF) are using faulty assumptions.

ФОТО Saudi Finance Minister Mohammed al-Jadaan