Saudi Arabia narrows third quarter fiscal deficit thanks to revenue uptick

Oil and non-oil income rose thanks to surge in crude prices and economic reforms

FILE - In this May 29, 2009 file photo, an oil rig works in the desert oil field of Sakhir, Bahrain. Crude prices shot above $70 a barrel Tuesday, Sept. 8, 2009, as a falling dollar pushed investors to commodities such as oil and gold. (AP Photo/Hasan Jamali, file)   *** Local Caption ***  NYBZ121_Oil_Prices.jpg
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Saudi Arabia, the world’s biggest oil exporter and largest Arab economy, narrowed its fiscal deficit in the third quarter to 7.3 billion riyals compared to 7.4bn riyals in the previous quarter thanks to an uptick in oil and non-oil revenues.

The budget deficit in the first nine months of this year shrank 60 per cent to 48.98bn riyals compared with 121.46bn riyals in a year-earlier period, the ministry said in a statement on its website. The government has forecast a fiscal deficit of 194.66bn riyals for 2018, compared with 238.49bn riyals in 2017.

"While clearly assisted by improvements in the oil price internationally, these figures also show the fruits of the successful implementation of many initiatives to develop non-oil revenues and improve spending efficiency,” said Mohammed Al Jadaan, the minister of finance.

Regardless of third quarter results, challenges in the public finances still exist and require the government to maintain its efforts to forge ahead with reforms, he added.

Saudi Arabia has been undertaking a series of reforms to narrow its fiscal deficit which reached a record 367bn riyals in 2015. The measures include the introduction of 5 per cent VAT and levies on tobacco and energy drinks as well as raising electricity and fuel prices.

"The improvement in the budget position almost entirely reflected the boost from higher oil prices," said Capital Economics in a note. "However, that masked a further loosening of the underlying fiscal stance – the non-oil budget balance widened again."

Revenues in the third quarter increased an annual 57 per cent to 223.26 billion riyals, with non-oil revenues growing 45 per cent year-on-year to 69.3bn riyals and oil revenue rising 63 per cent to 153.95bn riyals.

Brent oil prices during the quarter rose 4.1 per cent to an average of $75.89 per barrel. During last year's third quarter, Brent prices traded at an average of $52.1 per barrel.

“This [improvement in fiscal performance] has been the case despite the increase in spending on various social initiatives such as the Citizen Account, living allowances, and capital expenses on infrastructure,” said the minister. “We are determined to continue our economic reforms to achieve the Fiscal Balance Program's objectives, by raising revenues, improving government spending efficiency, and stimulating economic growth.”

The Citizen Account was created as a cash handout to low- and middle-income earners to protect them from the impact of energy reforms.

Spending during the quarter rose 21 per cent to 230.55bn riyals, with compensation to employees increasing 3 per cent to 109.75bn riyals in the third quarter. It accounted for 47 per cent of total expenditure.

The government is seeking to balance the budget by 2023 as part of an economic overhaul plan to wean the kingdom off oil income.

“We expect infrastructure spending to pick up in the fourth quarter,” Al Rajhi Capital said in a note. “In a nutshell, the deficit puts the government in a comfortable position to increase spending and clear payables by year-end.”

Public debt increased to 549.5bn riyals at the end of the third quarter compared with 443.3bn riyals at the end of 2017.

"Fiscal stimulus has supported stronger growth in the non-oil sector and we expect this trend to continue over the next few quarters," said Capital Economics. "But it also means that the government is in a somewhat weaker position to confront a renewed fall in oil prices. We expect Brent crude to drop to $60 per barrel by end-2019 which is likely to cause austerity to return to the agenda in 2020."