Here’s why the Saudi budget deficit will likely narrow in 2017

As Saudi Arabia prepares to announce its 2017 budget, analysts say they expect next year’s deficit to narrow to SAR 139 billion from a projected SAR 260 billion in 2016, according to a survey conducted by Argaam.

Revenue and expenditures are expected to decline 5 percent and 13 percent to SAR 587 billion and SAR 848 billion, respectively in 2016, they said.  But in 2017, the kingdom is likely to benefit from new tax policies as well as endowments and sukuk to cut the deficit as the government goes ahead with select infrastructure projects.

Most analysts surveyed agreed that Saudi Arabia has successfully deployed various instruments to cut the fiscal deficit this year, and will continue to take new measure to narrow it further in the new year, such as further slashing energy subsidies by 20 percent to 50 percent.

1) Fahad Al-Turki, chief economist and head of research at Jadwa Investment, said the policies used by the Saudi government to control deficit will push revenue up in 2016 and 2017, in line with the kingdom’s national transformation plan (NTP) and Vision 2030.

2) Turki Fadaak, head of research at Albilad Capital and Mazen al-Sudairi, head of research at Alistithmar Capital, said the policy tools that helped curb the deficit have, unfortunately, impacted retail purchasing power and lowered real gross domestic product (GDP). They also sent unemployment rates higher.

Fadaak added that tax policies represent a new instrument that could be used positively with no impact on economic growth. Al-Sudairi, meanwhile, expects government spending to improve next year as projects that were canceled in 2016 are revived as part of efforts to stimulate economic growth and raise domestic investments through state-owned funds.

3) Faisal Hasan, senior vice president of investment research at KAMCO Investment Co., said oil prices were critical, as improvement in oil prices and spending on select infrastructure projects would gradually curb deficit over the coming years.  He added that infrastructure projects could benefit from the untapped debt market in the kingdom next year.

4) Mohammed Allam, analyst at Alaz Management Consulting, said the expected deficit for 2017 will mainly stem from lower-than-expected spending— rather than higher revenue—due to the impact of the drop in oil prices on revenue, coupled with the geopolitical effect of the kingdom’s active role in the region. In addition, the government is now faced more pressure to provide a larger national security network for distressed Saudis, Allam added.

5) Hans-Peter Huber, chief investment officer at Riyad Capital, ruled out any significant rise in the Saudi stock market ahead of the budget announcement, thanks to the rally it has seen over the last six weeks on better macroeconomic conditions in the kingdom. Any market reaction will mainly depend on the budget data. He also sees the government spending more in 2017 to recover gradually, backed by growth in capital expenditure.

6) Ibrahim Al-Mulhim, analyst at Al Muhaidib Group, said the government’s next measures will be directly related to lowering expenses.