Saudi Arabia Sees Non-Oil Economy Rebounding on State Spending
Saudi Arabia to Boost Spending Next Year With Economy Struggling
(Bloomberg) -- Saudi Arabia expects its economy to rebound in 2018, a crucial year for Prince Mohammed bin Salman’s blueprint for the post-oil era, as authorities ease an austerity drive that hurt growth.
The non-oil economy, the engine of job creation in the kingdom, is expected to grow “north of 3 percent,” Finance Minister Mohammed Al-Jadaan said in an interview with Bloomberg TV in Riyadh on Tuesday. That’s twice the 2017 rate.
After two years of austerity, Saudi officials rolled out plans that seek to balance the need to rebuild state coffers while avoiding crippling private businesses. An expanding economy could make it easier to advance key elements in the prince’s long-term plan in 2018, including selling a stake in state-run oil giant Aramco to help create the world’s largest sovereign wealth fund.
The government plans to raise total spending to 1.1 trillion riyals ($293 billion) from 926 billion in 2017. The increase will help counter revenue-boosting measures, such as the introduction of value-added taxation and a levy paid by companies on expat workers. Overall growth is expected to rebound to 2.7 percent after lower oil prices drove a 0.5 percent contraction in 2017.
Non-oil revenue is expected to rise to 291 billion riyals from 256 billion riyals, with total receipts up 12.5 percent to 783 billion riyals. The government expects the budget deficit to narrow to about 7.3 percent of gross domestic product from almost 9 percent this year.
The kingdom “found it appropriate to move to a more optimistic scenario” in its fiscal planning, Economy Minister Mohammad Al Tuwaijri told a news conference in Riyadh. “We’re very satisfied with what happened in 2017, and we’ll continue on this journey.”
The economy contracted 0.5 percent this year after the kingdom led efforts by OPEC and non-OPEC members to cut crude production to boost prices, and austerity measures weighed on non-oil industries.
“The Saudi budget marks a break with the earlier strategy of substantial deficit reduction. This is sensible and will help the economy grow somewhat faster next year,” said Ziad Daoud, Dubai-based Bloomberg economist. “But unless oil prices keep rising, further consolidation will eventually be needed to put the public finances on a sustainable footing.”
While Brent crude prices have increased more than 10 percent this year to $63.83 per barrel, they are still significantly below their 2014 peak levels. To balance its budget, Saudi Arabia needs an oil price of $87 per barrel next year, according to Bloomberg Economics.
The government earmarked 210 billion riyals for defense spending in 2018, less than last year but the largest component in the new budget -- surpassing education.
The government, chaired by King Salman, approved the budget shortly after Saudi forces said they intercepted a ballistic missile fired by pro-Iranian Yemeni rebels at the main royal palace, a sign of Saudi Arabia’s growing entanglement in regional conflicts as Prince Mohammed seeks to curb rising Iranian influence in the Middle East.
Other highlights from the budget release include:
- Target for achieving fiscal balance delayed to 2023 instead of 2019
- Government’s spending plan includes 83 billion riyals from the sovereign wealth fund and 50 billion riyals from national development funds, in addition to 978 billion riyals allocated in the budget
- Inflation is expected to reach 5.7 percent, from a negative rate at the end of 2017
- Government expects to spend 32 billion riyals in 2018 on a cash-transfer program designed to protect middle- and lower-income Saudi families from planned increase in fuel and electricity prices
Last week, the government announced a 72 billion-riyal stimulus package. Officials have indicated that they will raise domestic fuel prices at a slower pace than previously targeted. The money will be spent over three years, the finance minister said on Tuesday.
--With assistance from Alaa Shahine Archana Narayanan Sarah Algethami Matthew Martin Zainab Fattah Arif Sharif Dana El Baltaji Ahmed Feteha Glen Carey and Hussein Slim
To contact the reporters on this story: Vivian Nereim in Riyadh at vnereim@bloomberg.net, Yousef Gamal El-Din in Riyadh at ygamaleldin@bloomberg.net, Matthew Martin in Riyadh at mmartin128@bloomberg.net.
To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Ben Holland
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