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The Saudi 2019 budget explained: Are finances a picture of health?

Saudi just announced its State General Budget for the fiscal year of 2019, and the data has revealed mix results.

So, what does the data tell us, and what will 2019 hold for the Kingdom financially?

Deficit still there but lower

In what is most likely the greatest takeaway from the whole announcement, Saudi is projecting a deficit of $35 billion next year, or 4.2% of GDP.

This comes across as alarming because the Gulf nation has been reporting budget deficits since the oil price crash in 2014. Yet, this percentage has been improving in recent years. 2019’s deficit is about 32% lower than the estimated deficit of $52 billion for 2018, which was 4.6% of GDP. According to the Saudi Press Agency, the budget deficit was 9.3% of GDP in 2017, while Arab News notes a deficit proportionate to 12.8% of GDP in 2016 and around 15% of GDP in 2015. The recovery of oil prices since 2014 is clearly reflected in the gradual shrinking of the deficit.

According to reporting by AFP, 2019 spending is estimated at $295 billion (up 24% on 2018 estimates), while revenues, mostly from oil, are estimated at $260 billion, said a statement read by Saudi King Salman.

This has caught the media’s attention because it is the Kingdom’s largest budget yet, and a 7% increase from a $274.53 billion budget in 2018.

“This year’s budget continues to improve the efficiency of public fiscal management, and promote economic stability and financial sustainability,” Crown Prince Mohammad Bin Salman said.

According to finance ministry figures, Saudi has tallied a collective deficit of $313 billion between 2014 and now.

What will happen to oil revenues?

In reality, the future of oil is dependent on many variable factors such as demand/supply, OPEC production cuts, geopolitics, new field discoveries, and more. Today, oil prices have reached alarming lows since the US sanctions on Iran in Nov 4. In an effort to balance oil prices, US President Donald Trump issued waivers to allow certain countries to continue to import Iranian oil. This, compounded by an output boom in October by Saudi, led to an oversupply in the market.

The oil market is currently facing many obstacles, as is reflected by $56.50 per Brent crude barrel. Some of these include uncertainties regarding an incoming recession, the geopolitical situation, and nearly fully-stocked oil reserves.

(Graph by NASDAQ)

To counter this, OPEC announced this month that it would oversee output cuts in 2019, to help raise the price of oil and stabilize it. Saudi Arabia would need Brent crude to trade above $95 a barrel for the year for the Kingdom to balance its books, according to Bloomberg economist Ziad Daoud.

READ: Revealed: OPEC will agree to cut at least 1 million bpd of oil

Concerns for the Saudi economy

Besides the budget deficit, Saudi still has some issues to contend with.

In an effort to improve its ailing unemployment rate, which is currently registered as 6% as of December 2018 by Trading Economics, the country announced a nationalization scheme known as Saudization in 2016, which seeks to improve the employment rate of nationals, while fining expats and expat-hiring businesses.

This slightly backfired last year, when hundreds of thousands of expats left the country under new financial pressures, causing the economy to actually shrink in 2017. Newly introduced VAT hasn’t made lives easier, either.

To top things off, Saudi has ensured the continuation of its allowance program, which provides civil servants and soldiers with a monthly allowance of $266 (SAR 1000), according to SPA. It is estimated by officials that this allowance program costs the Kingdom more than $13 billion annually.

READ: Expert opinion: Does Brexit pose an economic puzzle to the GCC?

Non-oil revenues key to improving Saudi’s financial standing?

(Table by the Saudi Ministry of Finance)

To narrow the deficit, the country announced that it would tap into its reserves and resort to borrowing. State reserves managed by the Saudi central bank have climbed to $523 billion from less than $480 billion a few months ago, the minister said, and as reported by AFP.

The country’s financial standing has been improving in recent years however, thanks to more than the aforementioned recovery of oil prices.

“The 2019 Budget Statement shows significant progress in various social, economic and developmental aspects, most notably: an increase in oil and non-oil revenues, the ongoing implementation of initiatives under Vision 2030, the development of basic services provided to Saudi citizens, and the enhancement of the private sector’s role as a strategic partner in the country’s growth,” the Saudi Press Agency (SPA) said.

Saudi’s focus on non-oil industries is beginning to pay dividends. Crown Prince Mohammad bin Salman said that non-oil revenues increased from $34 billion in 2014 to $77 billion this year and are estimated to reach $83.5 billion or a third of total revenues.

As for VAT, the finance ministry said it collected $12 billion from the sales levy in its first year of introduction.

The economy also reflected these new returns. The finance ministry stated that the economy grew by 2.3% in 2018, compared to the 0.9% shrinking in 2017.

It expects growth to hit 2.6% in 2019.

Overall, the Kingdom looks set to achieve the fiscal balance it is seeking in 2023. If it can address the looming threat of an uncertain oil market, and with continued emphasis on non-oil income, this goal is not entirely unattainable.

READ: Total revenue to rise 11%: Saudi reveals 2019 Preliminary Budget