Saudi Arabia’s recent announced budget is expected to have positive implications on bond markets and boost spending in the short term.
However, it is also likely to boost input costs for corporates in the kingdom over the next few years, according to a report by Global Investment House.
In its 2017 budget, Saudi forecast a deficit of SAR198bn (7.7 per cent of GDP), with projected revenue of SAR692bn – up 35 per cent compared to the budget in 2016, including oil revenue of SAR480bn, 46 per cent higher than 2016.
Total expenditure is projected at SAR890bn.
“The focus was on avoiding huge increases in spending and ensuring an emphasis on financial control,” Global said in its report.
“The increase in projected revenues and expenditure is mainly attributed to the energy pricing reform programme, though this would be partly offset by the allowances given to citizens needing government support,” the report said.
While the budget did not announce an immediate increase in the fuel prices, reforms in domestic energy prices are anticipated to be gradual and linked to international markets from 2017 to 2020.
Also, any such escalation is expected to be linked with the introduction of direct cash transfers to needy citizens.
The kingdom also announced various measures to boost non-oil revenues including the introduction of visa taxes on non-Saudi workers and an increase in tobacco and sugar taxes.
Also, Saudi confirmed that it plans to implement VAT starting 2018 to boost revenues. However, contrary to rumours, the government categorically denied plans to introduce income tax in the kingdom.
The introduction of various taxes on expat visas over the next three years is set to push Saudisation and consequently increase labour costs for the corporate sector, the report stated.
In its budget, the kingdom added a provision to levy fees on each dependent of an expat worker.
An expatriate worker will have to pay SAR100 for each of his dependents every month, when the fee is implemented in 2017. That amount will increase by SAR100 every year to reach SAR400 per dependent by 2020.
For companies employing expats, the monthly fee is expected to stand at SAR300-SAR400 per expat employee by 2018, and increase to SAR700-SAR800 per employee by 2020.
With the kingdom estimated to have over 11.6 million expatriates, the proposed fee is anticipated to add over SAR2.67bn per year to the government’s revenues from the first year of its implementation.
Apart from higher labour costs, a reduction in energy subsidies (electricity, water and gasoline) would further raise energy input costs for businesses in the kingdom, the report added.
In the short-term, the implications will be positive, it stated.
“We expect bond markets to perceive the budget favourably as investors gain comfort from reduced deficit. Also, the direct cash transfer scheme should support consumer spending in the kingdom, otherwise adversely impacted by a reduction in subsidies,” Global said.
“Given that an increase in feedstock prices is not expected before 2019, it remains a positive for the petrochemical industry which has been benefitting from the rise in oil prices.”