Emerging

Growth-friendly fiscal policy

st  
21  
EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
Saudi Arabia  
Growth-friendly fiscal policy  
Non-oil GDP growth rebounded strongly in 2019 after three years of disappointing performances. Household consumption and  
public sector investment spending are the main growth engines driving the recovery. Economic prospects are still positive in the  
short term due to the slowdown in the pace of fiscal reforms. The fiscal deficit will remain high, although exceptional one-off income  
and the transfer of spending to extra-budgetary entities should help hold it down. Potential growth is hampered by the erratic pace  
of fiscal reforms and the mixed outlook for the oil market.  
Rebound in non-oil activity confirmed  
1-Forecasts  
Non-oil GDP growth has accelerated rapidly since Q2 2019.  
According to our estimates, non-oil GDP rose 4.3% in Q3 2019,  
compared to 3.1% in Q2 and a 2018 average of 2%. The driving  
force behind this recovery is above all the rebound in household  
consumption. Retail sales (9% of GDP) rose 8%. Construction and  
the combined real estate and finance sectors also contributed to  
growth, rising 4.6% and 6.3%, respectively. Together they account  
for about 15% of GDP. These trends were confirmed by the  
increase in household mortgage loans (12% of total private sector  
loans), which have increased significantly since 2018. In Q3 2019,  
they were up by a third year-on-year. In contrast, the manufacturing  
sector (excluding refining) continued to contract for the third  
consecutive quarter (-0.8%).  
2018e 2019e 2020e 2021e  
Real GDP growth (%)  
2.2  
0.7  
1.2  
1.6  
Inflation (CPI, year average, %)  
Central. Gov. balance / GDP (%)  
Central. Gov. debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
2.5  
-1.2  
-4.6  
0.6  
1.2  
-5.9  
-7.4  
-7.1  
19  
24  
26  
30  
9.0  
4.8  
1.8  
4.0  
25  
30  
34  
36  
Forex reserves (USD bn)  
498  
458  
382  
314  
Forex reserves, in months of imports  
Exchange rate USDSAR (year end)  
28  
24  
20  
16  
3.75  
3.75  
3.75  
3.75  
e: BNP Paribas Group Economic Research estimates and forecasts  
2
- Real non-oil GDP growth  
yoy %  
Non-oil private sector GDP ▪▪▪ Government services  
According to preliminary estimates, fiscal expenditure declined by  
2
.8% in 2019. Yet the total wage bill (50% of total spending)  
increased by 4.1% in 2019. Moreover, the Saudi sovereign fund PIF  
Public Investment Fund) increasingly intervened in the  
(
20%  
government’s investment policy, largely offsetting cutbacks in  
government investment. Despite the nominal decline in government  
spending, public spending, as a whole, held to an upward trajectory  
and had a positive impact on economic activity.  
1
5%  
10%  
1
According to our leading indicator for the non-oil sector , the  
5
%
%
recovery is confirmed in the quarters ahead. The indicator has  
trended upwards for the past two quarters, after declining for 14  
consecutive quarters. On the whole, we estimate non-oil GDP  
growth at 3.5% in 2019. For the economy as a whole, GDP is  
expected to increase slightly (+0.7%) and will continue to be  
hampered by the decline in oil GDP (-3.4% in 2019).  
0
-5%  
2011 2012 2013 2014 2015 2016 2017 2018 2019  
Source: General Authority for Statistics, BNP Paribas  
Non-oil GDP is expected to remain robust in 2020. The  
government’s fiscal plan calls for current account spending to be cut  
by 3% while the total wage bill is expected to hold steady. After  
averaging -1.2% in 2019, driven by the ongoing decline in rent ,  
inflation is expected to swing back into positive territory and average  
Yet, recent labour market trends are likely to boost private demand.  
The unemployment rate for Saudi nationals should continue to  
decline and the participation rate to rise (notably among the young)  
in 2020. Moreover, the leaving of foreign workers from the labour  
market (net departures of roughly 2 million foreigners since 2017)  
has dwindled sharply since mid-2019.  
2
0
.6%, which means the public sector wage bill should decline in real  
terms.  
Although government investment spending is expected to remain  
flat at best, public investment spending by PIF should reach cruising  
speed and make another positive contribution to the construction  
and real-estate sectors. We expect hydrocarbon GDP to stabilise as  
1
Based on the following indicators: cement production, number of letters of  
credit and ATM cash withdrawals.  
2
The “rent, water and energy” component of the consumer price index has a  
weighting of 25%.  
st  
22  
EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
any new cutbacks in crude oil production could be offset by an  
increase in other hydrocarbon production.  
3- Fiscal balance  
%
of GDP  
All in all, in 2020 we are looking for non-oil GDP growth of 3%,  
which should bring total GDP growth to 1.2%.  
Fiscal balance  Expenditure  Oil revenues  Non-oil revenues  
%
5
4
3
2
0
Contrasting fiscal trends  
0
0
0
Fiscal deficits have been recurrent and rather significant since 2014.  
The public finance situation has deteriorated due to troubles  
controlling spending and the poor diversification of revenues at a  
time when the oil market is depressed. According to preliminary  
estimates for fiscal year 2019, the fiscal deficit is narrowing even  
without the implementation of reform measures. This improvement  
was made possible by exceptional one-off operations and the use of  
non-budgetary funding.  
10  
0
-
10  
20  
-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019f  
In 2019, the fiscal deficit amounted to 4.6% of GDP, down from  
5
.9% in 2018. Debt servicing charges increased by 40%, but only  
Source: MoF, BNP Paribas  
account for 2% of total spending. A large part of the adjustment was  
made through a 9% cut in capital expenditure (which accounts for  
16% of total spending). Indispensable for the modernisation of the  
Government assets held with SAMA should amount to USD 142 bn  
(18% of GDP). Assuming greater recourse to debt financing in the  
years ahead, government debt could swell to 34% of GDP in 2022  
while assets held with SAMA would be equivalent to 14% of GDP.  
The government’s solvency does not seem to be at risk in the short  
to medium term, especially if we include PIF assets, which are  
valued at about 50% of GDP.  
economy, capital expenditure is now assured in part by the state  
Public Investment Fund. Diversification of fiscal revenue is  
progressing very slowly in the absence of new reforms. Non-oil  
revenue increased by 7% and still accounts for a third of total fiscal  
revenue. Although Brent crude oil prices fell by 11% on average in  
2
019, oil revenue was virtually flat (-1%). Revenue levelled off  
thanks to an exceptional dividend from Aramco, the national oil  
company. This means the improvement in the public accounts in  
Even so, public finances are still highly vulnerable to oil price  
fluctuations. Economic activity continues to depend on public  
expenditure. The potential growth rate is hampered by the erratic  
pace of fiscal reforms and the mixed outlook for the oil market.  
2
019 was partially artificial.  
In 2020, the draft fiscal bill calls for spending cuts roughly equivalent  
to the 3% reported in 2019, with a decline in current account  
spending (except the debt service, which will increase by 48%) and  
virtually flat investment spending. At a time when a fiscal stimulus is  
needed to boost domestic demand, we think it is more realistic to  
expect current account expenditures to remain flat at best. As to  
revenue, no reform measures were announced that would increase  
the share of non-oil revenue. The government is forecasting a 2%  
increase in non-oil revenue. To estimate oil revenue, the  
government used an average price of Brent crude oil of USD 64 per  
barrel, bringing the decline in oil revenue to 16%. We expect the  
average oil price to be lower, which means an even sharper decline  
in oil revenue (-20%).  
Our central scenario calls for a fiscal deficit of 7.4% of GDP in 2020.  
The main uncertainty is whether Aramco’s 2019 dividend pay-out to  
the government was exceptional or not. If it is repeated in 2020, the  
fiscal deficit would narrow to 4.2% of GDP.  
Public debt increases moderately  
The fiscal deficit is traditionally financed through debt issues and the  
withdrawal of assets from the government’s account with the Saudi  
Arabian Monetary Authority (SAMA). In 2020, according to official  
statements, about 35% of the deficit will be debt financed, including  
45% on international markets. Consequently, we expect government  
debt to increase to 26% of GDP by year-end 2020.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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