KSA deficit well within targets
The Saudi Ministry of Finance published a Q3 deficit of SAR 48.7 billion, bringing the nine-month year to date deficit to SAR 121.5 billion.
The nine-month deficit is equivalent to 4.8 per cent of GDP, and 6.4 per cent on an annualised basis, below Saudi’s budget of 7.8 per cent, and IMF forecast of 8.6 per cent. The fiscal spending and deficit are now at c.65 per cent of FY 17e budget. Spending is likely to increase in Q4, even though the government typically freezes its accounts towards the end of the year.
Year to date revenues were boosted by the higher oil price. Revenues were up by 23 per cent year-on-year in the nine month period, mostly due to higher oil revenues, which were up 32.5 per cent year-on-year despite the cut in production, while non-oil revenues were up by 6.4 per cent, mostly due to a 34.6 per cent increase in taxes on goods and services following the introduction of the excise tax and an increase in other income, which includes returns from SAMA and the PIF.
Spending remains well contained (0.4 per cent year year-on-year), though picked up from H1 (-1.9 per cent year-on-year), now reaching 64 per cent of FY 17e budget, despite increase in military spending (24 per cent of spend), however infrastructure spending remains very low. The largest component of spending, compensation of the public sector employees that makes up 53 per cent of spend, was relatively stable, growing by only 1.2 per cent year-on-year in the ninth month, though up by 9.3 per cent year-on-year in Q3, most likely on the back of the reinstatement of public sector bonuses and allowances.
This was offset by lower spend on goods and services, making up 11 per cent of total, that were down by 24.9 per cent over the nine months, though still up 4.4 per cent in Q3. In addition, financing costs more than doubled by 138 per cent in the nine months, though still making up less than one per cent of total spend. From a sector perspective, spending on infrastructure and transportation was well below budgeted levels at 34.2 per cent of FY 17e at just 3.1 per cent of total spending in 9m, while general items are at 48.5 per cent and economic resources at 50.9 per cent. The rest of the sectors range in the 68 to 72 per cent levels, with military the closest to budgeted levels at 72.3 per cent or 24 per cent of the total 9m spending, due to ongoing conflicts in the region.
A total of 75 per cent of Q3 deficit is financed through domestic bond issuance. The Saudi government raised more funds than required this quarter (SAR 58.5 billion vs. a deficit of SAR 48.7 billion) as it has done for each of the past two quarters. The bulk of the financing came from SAR 37 billion in domestic borrowing, while reserves fell by SAR 15 billion and the government withdrew SAR 6.5 billion from its 2016 current account. The government debt position continues to edge up and now stands at $100 billion, 14.8 per cent of GDP though well below its self-imposed cap of 30 per cent by 2020e, up from $91 billion last quarter, with 64 per cent held domestically.
We expect KSA to increase spending in 2018, in order to boost nonoil GDP growth and Saudi is likely to push back its fiscal breakeven target to 2022/3, in-line with IMF guidance. The current FY 18e spending guidance already pencils in a 4.3 per cent increase in spending, but the higher oil price provides further fiscal space, with an estimate deficit of merely 1.6 per cent of GDP if Brent stays at $61/bbl.