Complex Made Simple

IMF on Saudi- Pleased with reforms but caution on spending advised

According to the IMF 2018 Article IV consultation, press release and staff report, Saudi oil output fell by 3.1 %, while non-oil GDP grew by 1 % after near stagnation in 2016. In contrast, the construction sector output declined for the second successive year and the non-oil output gap was estimated at -3.7 % in 2017. 6.

On the positive end, the employment of nationals, particularly women, increased in 2017. The employment of nationals increased by 3.3 % yoy in 2017Q4, although with expatriate employment declining by 4.3 %, while total employment fell by 2.6 %.

Riyadh’s budget deficit is expected to continue to narrow from 9.3 % of GDP last year to as low as 1.7 % next year, the IMF said. The fiscal deficit is projected to narrow to 4.6 % of GDP in 2018.

“Over the medium-term, however, the deficit is projected to widen to 3.6% of GDP in 2023 rather than move to balance as projected in the 2018 budget,” said the IMF.

Employment of Saudi women increased by 6.3% and their unemployment rate fell to 31% from 34.5% in 2016, Q4.

So what is the issue?


The IMF cautioned Saudi against increasing public spending and with keeping it sustained as oil prices rise, on the chance that they could as easily drop, leaving the budget exposed and creating volatility.

Brent stands at close to $76  climbing on fears of disruption to global supply as the Nov 4 sanctions deadline on Iran approaches.

A sharp rise in oil prices meant a 67 % surge in Saudi revenues in Q2, 2018, while public spending rose 34%, according to government figures.

Just under 50% of spending is on wages for public sector employees, according to the IMF, which proposed “the workforce could be gradually reduced through natural attrition”.

Unemployment among Saudi citizens is at 12.8% and sits at 31 % among women.

“Higher exported oil, domestic energy, and non-oil revenues more than offset additional capital spending, compensatory payments to households through the citizens’ accounts, and the cost of the January Royal Decree which introduced monthly allowances for public sector workers, retirees, students, and those on social benefits through end-2018 (1.8 %of GDP),” said the IMF.

“An oil price of $73 a barrel in 2023 rather than $59 a barrel in staff’s baseline would be needed to balance the budget in 2023.”

In 2019, non-oil growth is forecast to slow to 2.1% with the ending of the fiscal stimulus, but then to pick-up over the medium-term as structural reforms begin to bear fruit.

Has Saudi got other ideas to maintain a high level of spending?

Out of budget spending

Saudi Arabia’s sovereign wealth fund has raised the first commercial loan, an $11 billion loan from banks, a source with direct knowledge of the matter told Reuters, as it seeks to boost its firepower to finance the kingdom’s economic transformation plans.

News of the loan, which was increased from an initial guide size of $6 billion to $8 billion comes after Saudi Arabia indefinitely postponed plans to list state oil giant Aramco, according to four industry sources.

The sovereign fund will pay a margin of 75 basis points over the London Interbank Offered Rate for the loan, the same as that which the Saudi government secured when it raised a syndicated loan earlier this year, the source told Reuters.

The debt raising diversifies PIF’s sources of funding, which in the past were capital injections and asset transfers from the government as well as earnings from existing investments.

The fund is expected to receive some $70bn-$80bn from the sale of part or all of its stake in petrochemical company Saudi Basic Industries Corp (SABIC) to Saudi Aramco.

Riyadh-listed SABIC, the world’s fourth-biggest petrochemicals company, is 70 percent owned by the PIF. It has a market capitalization of $98 billion.

Status of Reforms

IMF Staff welcomed the authorities’ intention to continue to gradually increase energy prices to benchmark levels by 2025. They recommended, however, that the authorities provide more specifics about the future price increases to enable households and businesses to plan their adjustment, introduce automatic pricing mechanisms once prices reach benchmark levels, and increase transparency about the reference prices. The cross-subsidies in the energy sector also need to be clearly identified and made transparent. The authorities indicated that they are considering periodic adjustments to prices that are at benchmark levels, but at present have no plans to provide additional details of future price increases beyond what is set out in the 2018 Budget because the timing of the increases will depend on economic conditions among other things. A process is also underway to identify and make explicit the cross-subsidies in the energy sector.

As far as the wage bill, staff underscored the importance of containing the wage bill given that it accounts for about one-half of government spending and suggested that the workforce could be gradually reduced through natural attrition. The authorities explained that a civil service review is being conducted with the World Bank to help identify reforms to improve the cost-effectiveness of the civil service and deliver on the budget projections, and noted that civil service employment has declined in recent years.

Finally, with capital spending, the IMF said Saudi is planning to increase capital spending in support of Vision 2030. IMF staff welcomed the mechanisms being put in place to review existing and new capital projects before they are funded, but noted that it is too early to say whether the public investment management process has been strengthened sufficiently to ensure that projects deliver efficiently on the intended outcomes.

Staff is, therefore, suggesting a cautious approach to ramping up capital spending.