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Saudi macro | 2019 budget: A read between the lines

Exaggerated oil revenues likely dictated by politics. Revising down revenue assumptions from the September 2018 pre-statement, due to the oil market and political headwinds that followed in October 2018, would have: i) signalled political weakness, under pressure to reduce oil prices, and ii) dampened growth prospects for Saudi in 2019, in our view. On our calculation, the breakeven oil price is USD84/bbl, and SAR662bn in budgeted oil revenues imply a Brent price of USD70/bbl. A USD10 drop from the latter translates into USD41bn in funding needs, likely to be covered from reserves and government accounts with SAMA. Both registered a combined USD657bn as of October, comfortable levels in our view. Favourable public debt/GDP of 19% in 2018 also gives room for borrowing, and, accordingly, we see no jeopardy to funding in 2019.

Non-oil revenue indicates slower pace of austerity. 2019 non-oil revenue growth stands at 9%, 5% below the previous year’s target. The budgeted tax revenue growth of 10% indicates no surprises in 2019, especially when compared to the 91% growth recorded in 2018. We expect a 50% increase in expat and dependant fees, and the VAT implementation on companies with revenues

Expenditure growth intact, considering 2018 base effect. Expenditure growth of 7.4% is not low if we account for the 5.3% cost overrun of 2018, driven by the re-instatement of government perks, Citizen Account, and private sector support. Reinstatement of monthly allowances and benefits to all government employees, effective January 2019, will help preserve spending activity. This is despite the SAR18bn drop in salaries from 2018, which we expect will be more than compensated by the SAR20bn budgeted increase in subsidies during 2019. We also find the 20% increase in capital spending to SAR246bn supportive to a gradual recovery in investment activity during 2019. Focus will remain on infrastructure development, improving public service provision, health, education, and utilities.   

2019 budget strikes acceptable balance to growth, in our view. We expect fiscal deficit/GDP will exceed the targeted 4.2% by 3.5%. However, we see fiscal accommodation in 2019 as necessary to overcome the contractionary monetary policy ahead, with the Fed guiding for 50bps rate hikes during 2019. We favour this over a more consolidated budget that could have negatively affected investor sentiment, consumer confidence, and credibility of home-grown reform programme, in our view.