December 18, 2018 / 4:21 PM / 8 months ago

Saudi 2019 state budget boosts spending

(Reuters) - Saudi Arabia plans to increase state spending by 7 percent next year in an effort to spur economic growth, which has been hurt by low oil prices, according to a 2019 state budget announced by King Salman on Tuesday.

MONICA MALIK, CHIEF ECONOMIST AT ABU DHABI COMMERCIAL BANK

The budget focuses on boosting activity after years of fiscal consolidation and weak growth. A key focus is on the investment side, but current expenditure will continue to dominate, and we think the continuation of allowances and the earlier resumption of annual bonuses for state employees will see a rise in wages, which will be positive for consumption.

    We see a weaker pace of fiscal reform next year so we think the budget will support a gradual pick-up in non-oil activity. Based on the spending growth and our assumptions for GDP and oil revenue next year, we think the budget deficit will widen back to over 7 percent of GDP next year.

    I estimate that the oil revenue assumption in the budget likely requires a Brent oil price of around $70-71 per barrel with oil production at 10.2 million bpd. We estimate that the budget break-even oil price will rise to $91.9 per barrel in 2019 from an estimated $86 in 2018.

JEAN-PAUL PIGAT, HEAD OF RESEARCH AT LIGHTHOUSE RESEARCH

This is a much lower increase in spending than I had been expecting. Government spending is what ultimately drives growth in Saudi (and the wider region) and without stronger stimulus, it is difficult to see where the spark for stronger demand will come from.

Of course, much might still come in the form of off-budget spending from the Public Investment Fund, as they are key players in many of the largest mega-projects that are set to get off the ground in 2019.

EHSAN KHOMAN, HEAD OF MENA RESEARCH AND STRATEGY AT MUFG

The first headline figures suggest that the Saudi 2019 budget statement is, at face value, credible, pragmatic and real GDP growth-enhancing.

The government appears to have struck a fine balance between focusing on stimulus to drive economic growth on the one hand, and fiscal prudence in accordance with its medium-term goal of balancing the budget by 2023 on the other hand.

Whilst economic growth is projected to rise to 2.6 percent in 2019, it does remain below the long-run equilibrium real GDP growth rate of 4.0-4.5 percent as the economy continues to address structural challenges, to structurally adjust the model away from cyclical reliance on oil revenues.

On the whole, the comprehensive details behind the headline figures highlight the lengths and seriousness the Ministry of Finance is willing to go to in order to provide a transparent and credible level of forward guidance to markets.

MARIOS MARATHEFTIS, PARTNER AND CHIEF ECONOMIST AT THE GOVERNANCE CREED, A GULF ADVISORY FIRM

Usually actual spending during the year tends to exceed what has been planned in the budget. What is important to note in this budget is that it is higher than the actual expenditure of 2018. This is an expansionary budget.

Second, I think Saudi needs an expansionary budget at this time. Growth in the GCC [Gulf Cooperation Council] has been low since 2014 for three reasons: monetary tightening through a stronger dollar and higher interest rates, fiscal austerity, and low confidence on the back of low oil prices. Although there are definitely merits to fiscal austerity, when the economy is soft and hit by other factors too, the timing is not right.

Third, it is not that important to hit zero deficit by 2023. That will depend mostly on where oil prices are. Let’s not forget that a few years ago and for a long time the budget was in surplus. What is important for me is for fiscal policy to be counter-cyclical. Expansionary when the economy is soft, and then tight and austere when oil prices are high and the economy is booming.

Reporting by Tom Arnold, Davide Barbuscia and Andrew Torchia

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