Saudi deficit to narrow as oil proceeds rise, says BMI

Budget to return to balance by 2024 as deficit shrinks from 9.3% of GDP in 2017

Saudi Arabia should consider raising its value added tax (VAT) to 10% from 5%, according to the IMF. Reuters

Saudi Arabia’s fiscal deficit will narrow at a robust pace over the next two years to reach 3.9 per cent of gross domestic product in 2019, as higher oil proceeds boost the kingdom’s income, according to a report.

Oil income, which accounted for 63 per cent of state revenues in 2017, is set to rise this year after oil prices hit more than a three-year high of $80 per barrel, BMI Research said on Wednesday.

Oil production levels are also forecast to expand in the second half of this year and into 2019, following the Opec decision in June to raise output, which had been capped since January 2017 to prop up oil prices.

BMI upwardly revised its deficit forecast for Saudi Arabia to 5.6 per cent of GDP in 2018, compared with 6.1 per cent of GDP previously, owing to upward revisions to their oil price forecasts.

Beyond that, the kingdom’s budget deficit is forecast to shrink to 3.9 per cent of GDP in 2019, down from 9.3 per cent of GDP in 2017. The budget is expected to return to balance by 2024, BMI said.

The International Monetary Fund said on Tuesday it expected Saudi's fiscal budget to narrow to 4.6 per cent of GDP this year and further to 1.7 per cent of GDP in 2019.

Saudi Arabia, the world's biggest oil exporter, began tightening its purse strings in 2016 to help narrow its fiscal deficit, which reached a record 367 billion riyals in 2015 in the wake of plunging oil prices. But fiscal consolidation efforts, which included increasing energy prices and freezing public sector salary hikes, have curbed Saudi Arabia's economic growth. Last year the kingdom unveiled an expansionary budget for 2018 with 978bn riyals in expenditures, a 5.6 per cent increase from 2017.

The kingdom is also implementing an economic overhaul plan and various reforms under the 2020 National Transformation Programme and its over-arching Vision 2030 agenda to help wean the country off oil income and create new revenue streams.

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Saudi Arabia is likely to keep tapping the debt markets to finance its deficit, given its low debt-to-GDP ratio.

"Over the coming years, we expect the government to keep relying on domestic and international debt markets to finance its deficit, rather than deplete its foreign reserves," BMI said. "This will result in an increase in the government’s debt-to-GDP ratio, from 17.2 per cent of GDP in 2017 to a forecast 32.4 per cent in 2022."

However, the government will likely take advantage of higher oil revenue to increase spending, partly offsetting these revenue gains and slowing the pace of deficit reduction, it added.

The IMF on Tuesday urged Saudi Arabia to accelerate its privatisation programme and warned against slowing the pace of its economic reforms as oil prices recover.