Saudi Arabia is expected to get a $21.3bn boost to non-oil revenues next year from new taxes and expat fees but could face a recession in 2017, according to Bank of America (BoA) Merrill Lynch.
The bank said in a report that the Saudi economy was facing a smaller than expected fiscal deficit this year due to “spending discipline and higher oil revenues” that saw the country post a shortfall of SAR73bn ($19.4bn) in the first half.
Saudi’s fiscal oil revenues appear to have been boosted by higher prices, up $12 a barrel over the same period, and a higher payout ratio from Saudi Aramco in the first half, according to the firm.
This was despite OPEC production cuts that meant Saudi oil exports were down 0.4 million barrels per day in the first half compared to the same period in 2016.
“The additional export revenues (SAR58.6bn) represent 70 per cent of the year-on-year increase in fiscal oil revenues (SAR82bn), suggesting a higher payout ratio from Saudi Aramco as oil prices recovered,” BoA said.
The kingdom was also found to be well short of targeted budget spending of SAR890bn ($237.3bn), with spending rates at 43 per cent of the target or SAR381bn.
However, BoA said this spending discipline is expected to be tested in the second half due to the reversal of public sector allowance cuts worth SAR7bn ($1.86bn).
This comes on top of a military one-off bonus of SAR4bn ($1.06bn) and a household allowance programme costing SAR25bn ($6.66bn) and delays to the linking of fuel prices to international rates – expected before year-end.
Based on the first half numbers, the bank said the authorities’ fiscal deficit target of 7.8 per cent of GDP or SAR198bn “could be within reach for 2017 at the current pace excluding any off-budget spending and seasonality.
“This is well below our expectations of SAR326bn (12.8 per cent of GDP) and last year’s outturn of SAR416bn (17.2 per cent of GDP),” it said.
On top of this, Bank of America said non-oil revenues were also expected to increase next year after dipping in the first half of 2017 to 45 per cent of the budget target.
It forecast that a recently introduced excise tax on soft drinks, tobacco and energy drinks, as well as a fee on expatriate dependents would add SAR7.5bn ($1.99bn) to non-oil revenues in the second half with further levies expected to boost revenues next year.
“The introduction of VAT, the introduction of an expatriate worker levy, the possible introduction of tariffs on luxury products and the increase in fees on dependents of expatriate workers could add SAR80bn ($21.3bn; 3.0 per cent of GDP) to non-oil revenues in 2018,” it added.
However, tighter spending is expected to restrict wider non-oil growth, which stood at 0.5 per cent in the first and BoA said the economy may not be able to avoid a “headline recession” as OPEC production cuts drive “real GDP growth to negative territory”.
“The weak economy complicates the government’s plans to implement further fiscal reforms. This may suggest a more back-loaded path for fiscal consolidation or the concurrent introduction of a private sector support package alongside fiscal reforms.”
The report follows a recent forecast from the Institute of International Finance, which said the Saudi economy would shrink 0.4 per cent this year following an increase in the Saudi unemployment rate to 12.3 per cent.