Economic Analysis - Q1 Pace Of Deficit Reduction Will Not Be Sustained - 22 MAY 2017

BMI View: Saudi Arabia ' s Q1 budget performance underpins our view for easing fiscal pressures in 2017 and for continued effort to improve the management of public finances. However, the pace of deficit reduction is unlikely to be sustained over the coming q uarters, following the reversal of fiscal consolidation measures in April 2017 and as gains from oil will be more difficult to achieve.

The release of Saudi Arabia's fiscal performance for Q117 supports our view that fiscal pressures will ease in 2017 as oil prices recover, and confirms the structural shift towards a more transparent management of public finances, which has been in play since the publication of the 2017 budget in December 2016. Saudi Arabia's fiscal deficit shrank by 72% y-o-y in Q117, from SAR91.5bn (USD24.4bn) to SAR25.9bn (USD6.9bn). The reduction of the deficit was largely attributed to a 115% y-o-y increase in oil revenues (78% of total revenues), while non-oil revenues increased by a weak 1% y-o-y. The government continued to rationalise spending, with expenditures declining by 3% y-o-y.

We believe that it will be tough for the government to replicate these rapid improvements in its fiscal position over the coming quarters, as the government backtracks on some fiscal consolidation measures and gains from higher oil prices start to fade. Nonetheless, this does not undermine our view that recovering oil prices and government efforts to rationalise spending will support the reduction of the budget deficit from 13.0% of GDP in 2016 to 8.5% of GDP in 2017. The government boasts sufficient levels of foreign reserves to cover its deficits over the coming years, although it will be reluctant to maintain the current pace of reserves depletion as it would weigh on investor sentiment. Therefore, it will continue to issue debt over the coming years to finance its deficits, in combination with reserves (see ' Fiscal Reform Underway, But Budget Deficits Until 2020', April 4 2017).

Rising Oil Prices Behind Improved Performance
Saudi Arabia - Fiscal Position, SARbn
Source: Ministry of Finance, BMI

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