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Saudi budget signals a new era

|By Arabian Post Staff|The 2016 Saudi budget marks a transformation, signaling the end of material overspending, introduces a medium-term fiscal strategy and sweeping subsidy changes, Bank of America-Merrill Lynch said in a special report. However, the budget does not signal any near-term changes to energy or Fx policy, in its view.

The report says the 2016 budget announcement is a significant one for the Saudi Arabian economy. It attributes the assumption to three main factors. First, it likely marks the end of material overspending practices given tighter controls. Second, it starts to introduce a credible medium-term fiscal consolidation strategy to address the oil price slump through revenue- and expenditure-side measures, the first round of which saw sweeping energy, water and electricity administered price changes. Last, it likely signals no near-term changes to energy or Fx policy, as reflected in the drop of SAR Fx forward points. Lower public spending should also contribute to slower real non-oil GDP growth.

The 2016 budget focuses on spending rationalization and restraint. BoA-ML said the era of material overspending is likely firmly behind us. Spending controls have been introduced through the setup of medium-term budget ceilings and of the National Project Management Agency to optimize and review capex. A Royal Order was in addition simultaneously passed to prevent the issuing of an order of commitment or disbursement that exceeds the allocated budget.

Also, the source of past overspending this past decade has been supplemental budgets passed during the fiscal year when the oil price turned above the internally budgeted oil price assumption. This is unlikely to be the case in 2016. The 1980s saw actual spending underspent versus the budget while the 1990s saw modest overspending.

The sweeping energy, water and electricity administered price changes decreed shortly after the budget announcement are a first step in the five-year fiscal consolidation and economic transformation strategy expected to be unveiled in early 2015. According to official pronouncements, this is likely to include PPP projects, privatizations, land tax, further review of energy, water, and electricity prices over the medium-term, review of current levels of fees and fines, introduction of new fees, completion of the necessary arrangements for the application of a VAT and introduction of excise taxes on tobacco and soft drinks.

The report estimates the natural gas price hike on petrochemical firms and gasoline and diesel price hike could add US$2.2bn and US$3.8bn to central government revenues if fully passed to the budget (a combined 0.9% of GDP). The direct impact of higher gasoline, water and electricity prices will add 1.3-1.5ppt to CPI inflation due to their low basket weights (c.1.5%, c0.4% and 1.6% respectively).