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Khatija Haque - Head of Research & Chief Economist
Published Date: 22 March 2020
The Saudi finance minister Mohammed Al-Jadaan announced an additional SAR 70bn in economic support measures for businesses over the weekend, in addition to the SAR 50bn in liquidity supporting measures announced by SAMA last week.
Most of the measures announce involve postponing fees and taxes for 1-3 months, and include a three-month grace period for the payment of VAT, income tax, excise tax and zakat by businesses to the government, waiving of expat visa fees and the postponement of customs duties collection.
The finance ministry will also make more funds available for loans and other financing through the Corporate Sustainability Programme, National Development Fund, the Saudi Export-Import Bank, the Kafala program and the General Authority for SMEs.
In our March Monthly Insights publication, we had revised down our estimate for the budget deficit in 2020 to -10.2% of GDP (USD 76.2bn), assuming a total 4.5% cut in government spending this year as well as significantly lower oil revenue. Late last week, the finance ministry announced that budget spending would be cut by SAR 50bn, bringing the total decline in spending to around -7% y/y, more than we had estimated.
However, the measures announced on Friday are likely to affect non-oil revenues. While the initial statement makes provision for a 3 month delay in payments, the actual level of VAT and other taxes collected is likely to be lower than it would have been given the impact of virus-related restrictions on consumption and overall economic activity.
As a result, we still expect the deficit to reach -10.0% of GDP this year (SAR 280bn, USD 75bn), as the additional curbs on spending will be offset by lower non-oil revenues. This is wider than the 7-9% budget deficit the government is now projecting in 2020.
The finance minister was rather vague about where the spending cuts would be targeted, except to say that it would be in areas “that have the least social and economic impact” and that funds would be reallocated to areas where there is greater need including health services and social spending.
Looking at how the government responded to the sharp drop in oil revenue in 2015-16, we expect most of the cuts to come from capital/ development expenditure. In 2015, capital expenditure declined -34% y/y and contracted a further -36% y/y in 2016. We have pencilled in a -22% cut in capital spending this year which may slow the pace of delivery on the bigger infrastructure projects.
Some components of current spending may also be reduced as many public sector workers have been told to work-from-home, although we don’t expect cuts to wages, subsidies, grants and social benefits.
Finance Minister Al Jadaan indicated that he didn’t expect debt issuance to exceed SAR 100bn (USD 27bn) in 2020, or around 40% of the government’s estimated budget shortfall this year. This is in line with the proportion of budget financing from debt outlined in the original budget for this year.
While no detail was provided on the split between external and domestic debt issuance, the government will likely be mindful of liquidity conditions in the domestic market in our view. We estimate at least half of the USD 27bn in borrowing – around USD 15bn – and possibly more is likely to be in the form of external debt issuance, particularly in the current low interest rate environment.
The authorities also announced that the ceiling for public debt was raised from 30% of GDP to 50% of GDP by 2022. Even taking into account the higher debt issuance this year, we estimate that debt-to-GDP will remain just below the 30% original ceiling in 2020, but will likely breach this in 2021.
The remainder of the deficit financing was going to come from the government reserve account at the central bank (SAMA), which stood at SAR 469bn (USD 125bn) at the end of 2019. The original budget for 2020 showed this government reserve figure declining to SAR 346bn by the end of 2020. This is now likely to decline further to SAR 280bn based on our estimates of the budget deficit this year, implying a withdrawal of around USD 50bn from the government’s account at the central bank.
It is important to note that the stock of foreign exchange assets held by SAMA is much higher than what is reflected in the government reserve account, standing at nearly SAR 1.9tn or USD 500bn at the end of January.
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