Saudi Tesla Investment Is a Bet on Future But Oil Remains King

(Bloomberg) -- Saudi Arabia is investing in future technologies such as electric carmaker Tesla Inc. to hedge against oil. But it’s the black stuff that’s still helping the kingdom shore up its finances.

Finance Ministry data released last week showed that income from crude exports surged 40 percent in the first six months of 2018, causing the budget deficit to narrow 43 percent. Non-oil revenue also jumped after authorities introduced value-added taxation.

Below are four main takeaways from the budget report:

Beating the Target

In January, authorities handed out 50 billion riyals ($13.33 billion) in new benefits to support Saudis days after raising fuel prices and introducing VAT, casting doubts over the government’s ability to meet its budget deficit target of 7.3 percent of gross domestic product.

Saudi Tesla Investment Is a Bet on Future But Oil Remains King

The additional oil revenue mean the kingdom is “on track for a narrower deficit this year,” said Khatija Haque, head of Middle East and North Africa research at Emirates NBD, Dubai’s biggest bank. “The higher oil prices have provided the fiscal space to boost spending.”

The median budget deficit forecast of eight economists surveyed by Bloomberg is at 5.5 percent of GDP for 2018, compared with 8.9 percent last year.

Oil Reliance

The 298 billion riyals Saudi Arabia reaped in the first half from oil sales represents 61 percent of its full-year target. Oil made up about 70 percent of total revenue in the second quarter, compared with 62 percent in the same period a year earlier.

Saudi Tesla Investment Is a Bet on Future But Oil Remains King

The rebound in oil prices helped the economy grow 1.2 percent -- the first expansion in five quarters. Non-oil economic growth, however, remained muted at 1.6 percent.

Non-hydrocarbon revenue climbed by about 50 percent, but customs receipts fell “due to the weak economic backdrop,” Mohamed Abu Basha, head of macro analysis at investment bank EFG-Hermes in Cairo, wrote in a report.

Spend More

Capital expenditures climbed 45 percent in the second quarter after shrinking in the previous three months. When annualized, the outcome is less impressive at 3 percent, Abu Basha said.

Saudi Tesla Investment Is a Bet on Future But Oil Remains King

For the non-oil economy to recover, investment spending needs to accelerate in the second half of the year, he said.

War and Welfare

Defense and social benefits were two areas seeing significant increases in spending during the first half.

Saudi Tesla Investment Is a Bet on Future But Oil Remains King

“Military spending accounts for around 20 percent of the budget,” Emirates NBD’s Haque said. “This will include salaries and pensions for military employees.”

©2018 Bloomberg L.P.