New wave of Saudi spending is no cause for concern

Neom

• Saudi Arabia recorded $800m deficit in Q1 2023
• Analysts believe there is still room for further investment
• Uncertainty over future oil revenue but tax receipts are growing

A spike in spending during the first quarter of 2023 is likely to lead to a “modest” full-year fiscal deficit for the Saudi government but room remains to make further outlays, experts say.

The government recorded a deficit of nearly SAR3 billion ($800 million) in the period, driven by a 29 percent surge in spending, while revenue rose by just 1 percent.

The biggest nominal increase was in procurement costs, with a 75 percent jump in capital spending.

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VAT receipts and increased taxes paid by foreign firms operating in the kingdom helped to drive a 9 percent rise in non-oil revenue over the first quarter of 2023 to more than SAR102 billion. This offset a 3 percent drop in hydrocarbon revenue, which totalled more than SAR178 billion.

James Reeve, chief economist of Jadwa Investment, said in a research note: “While this new wave of spending raises questions about sustainability, we think there is some room for additional government outlays this year and in the future.”

He said spending as a share of non-oil GDP has fallen over the past decade from around 55 to 30 percent, adding that despite some domestic banking liquidity tightness, there is “plenty of scope” to increase external borrowing to meet fiscal financing.

“The country is in the midst of an economic transformation and it is natural that the state should take the lead, both in investment and in providing support to those impacted by the transition.

“In time, it is expected that the private sector will increase investment – indeed, this is already happening.”

Jadwa forecasts higher than expected spending this year, while non-oil revenue is expected to show “decent growth” as ever-expanding consumption boosts tax receipts. 

“The main uncertainty lies with oil revenue,” Reeve said. This will be impacted by the estimated 500,000 barrels per day cut to Saudi production from May onwards as part of a broader Opec+ agreement.

But he added that Aramco’s announcement that it intends to start paying a performance-related dividend, probably from early 2024 onwards, has improved the outlook and could be worth an additional 2 percent of GDP to the government. 

“Against that, the reported plans to offload more Aramco stock could mean a modest hit to the central government’s future oil revenue, depending on the size of any divestment,” he said.

According to Jadwa data, while the government’s oil income was down by 3 percent in Q1 on the same quarter of 2022, the decline should have been around 20 percent given the differentials in crude pricing and production during the two periods. 

The likely explanation, it said, was that oil revenues were boosted by higher refining margins, as well as additions to refining capacity. 

The majority of non-oil revenue remains taxes on goods and services, which make up 62 percent of the total. This increased by 4 percent year on year, reflecting steady growth in point-of-sale and ecommerce transactions, offset slightly by cash transactions, which are in structural decline. 

Jadwa noted that there was also a surge in revenue from taxes on income, profit and capital gains (over SAR3 billion). These are applied largely to foreign firms, indicating the growing appeal of Saudi Arabia to multinational companies.

Latest data from the Ministry of Investment shows it issued more than 1,600 investment licences during Q1, up 30 percent on the same period the year before.

According to Jadwa, Saudi Arabia's total expenditure, which reached SR284 billion in Q1 was equivalent to 28 percent of its estimate of Q1 nominal GDP, partially driven by a 75 percent surge in capital spending. 

In recent years central government capex has declined as the Public Investment Fund has shouldered the burden of much Vision 2030 investment. 

But Reeve said there are still plenty of basic infrastructure projects that need to be rolled out, especially in and around Riyadh, whose population continues to expand at a rapid rate. 

Saudi spending during Q1 was also impacted by a 7 percent gain in employee salaries while social benefits spiked, growing by more than 50 percent year on year. 

This largely reflects the impact of the July 2022 Royal Order allocating additional resources to the Citizens’ Account and other social security channels to mitigate the impact of rising prices.