Saudi Arabia’s fiscal surplus experienced during the first quarter of this year is unlikely to last, even as non-oil economic growth is expected to pick up during the year, said a report.
The likely ramp-up in budget expenditures and, in particular, off-budget capital spending after the completion of the Sabic-Aramco-PIF deal, suggest non-oil activity is likely to pick up going forward, said the BofAML’s latest Global Emerging Markets Weekly report.
The 1Q19 fiscal balance stood at a surplus of SR27.8 billion ($7.4 billion; 0.9 per cent of GDP), with the primary balance registering a surplus of SR32.2 billion ($8.6 billion; 1.1 per cent of GDP). This is due to (1) an increase in Saudi Aramco special dividends to the budget; (2) non-oil revenues broadly on target; and, (3) seasonality and control of spending.
Increase in Aramco dividends supported the budget
Saudi Aramco's increase in dividend payments (74 per cent yoy) in 1Q19 brought annualized oil revenues on track to exceed the budget target. Oil revenues stood at SR169 billion ($45.1 billion) in 1Q19, up 6 per cent qoq and 48 per cent yoy. This is despite lower oil production and prices qoq. Some oil revenues to the budget may accrue with a quarter lag. However, to stay in line with the full-year budget oil revenue target, dividend payments would need to remain at this level, or crude oil production and prices may need to increase further.
“The increase in oil revenues in the budget reflects the Saudi Aramco disbursement in March of SR124 billion ($33 billion; 4.1 per cent of GDP) in quarterly dividends. This comprises SR48 billion ($13 billion) in ordinary dividends and SR75 billion ($20 billion) in special dividends,” said BofAML’s Mena economist Jean-Michel Saliba.
In comparison, in 1Q18, Saudi Aramco dividend payments to the government totalled SR71 billion ($19 billion; 2.4 per cent of GDP). This consisted of SR15 billion ($4 billion) and SR56 billion ($15 billion) in dividends, approved and paid in January and March 2018. Saudi Aramco paid a total of SR217.5 billion ($58 billion; 7.4 per cent of GDP) in cash dividends to the government over 2018.
“This suggests that a third of the total dividend payments were made in 1Q18, which may imply that further quarterly dividend payments in 2019 could be smaller in size, all things being equal,” said Saliba.
Non-oil revenues on track
Authorities' ongoing fiscal reforms and possible one-off revenues are keeping non-oil revenues on track. Non-oil revenues stood at SR76 billion in 1Q19, down 8.4 per cent qoq but up 46 per cent yoy. The base effects reflect the one-off inclusion in 2018 non-oil revenues of SR50 billion in cash collected in settlements from the government's anti-corruption probe.
1Q19 spending unsustainably low
Total spending stood at SR218 billion in 1Q19, 40 per cent lower qoq and 8.5 per cent higher yoy. Current spending stood at SR188 billion, down 31 per cent qoq and up 7.9 per cent yoy, and capital spending stood at SR29.2 billion, down 69 per cent qoq and up 12.4 per cent yoy.
Compensation of employees and social benefits remained at elevated levels. Spending control, particularly on the capex side, kept the annualized overall spending pace at just 80 per cent of the annual budget target. This suggests that spending is likely to increase in coming quarters, particularly given the seasonally low spending figures in the first quarters of the year.
Over-financing reduces supply risk
Budget over-financing in 1Q19 reduces the risk of over-reliance on international debt markets to finance deficits over 2019. This is in line with BofAML’s trip take-aways, after the 2019 budget assumptions could have suggested high external borrowing needs.
Despite the 1Q19 budget surplus, authorities raised SR28 billion ($7.5 billion) in external bonds and SR22.5 billion ($6.0 billion) in domestic bonds. However, authorities only used SR9 billion ($2.4 billion) in external borrowing and SR16.5 billion ($4.4 billion) in domestic borrowing proceeds to finance the deficit over the first two months of 2019 (2m19). This suggests that the fiscal balance swung from a deficit of SR25.5 billion ($6.8 billion; 0.9 per cent of GDP) over 2m19 to a surplus of SR27.8 billion ($7.4 billion; 0.9 per cent of GDP) by end-1Q19 thanks to Saudi Aramco dividends.
The partial use in 1Q19 of the proceeds of the January external bond issuance suggests that the remainder of the proceeds ($5.1 billion) may have still not been repatriated. They could be used for budget financing over the remainder of 2019. The timing of the USD dividend payment of Saudi Aramco could explain the increase in government deposits in SAMA (SR51 billion; $13.7 billion) and SAMA Fx reserves (SR56 billion; $14.9 billion) in March.
Financing discrepancies persist
Reconciling debt issuance and withdrawals of government deposits at SAMA with reported budgetary financing may suggest off-budget spending over 2m19. Authorities do not report having used government deposits at SAMA for budget financing over 2m19. However, government deposits at SAMA dropped by SR30.7 billion ($8.2 billion; 1 per cent of GDP) over 2m19 instead.
Discrepancies also exist over the whole 1Q19 period, although the implications are less clear. Government deposits at SAMA increased by SR20.9 billion ($5.6 billion; 0.7 per cent of GDP) over 1Q19. However, the sum of the 1Q19 fiscal balance (SR27.8 billion), 1Q19 domestic issuance (SR22.5 billion) and the used proceeds of the external issuance (SR9 billion), suggests instead that the government deposits at SAMA should have dropped instead by SR3.7 billion ($1 billion; 0.1 per cent of GDP).
Oil production response to Iran sanctions provides upside
The Saudi response to Iran sanctions could lead to higher oil production. BofAML estimates that every 250,000 bpd annual swing to Saudi oil production represents a change in its fiscal breakeven oil price by $2.2/bbl, leading to a 0.5ppt change in the fiscal balance, and a 0.8ppt change in real GDP growth.
BofAML expects the 2019 fiscal deficit to widen to SR230 billion ($61.5 billion; 7.7 per cent of GDP) based on oil prices of $70/bbl and crude oil production of 10.2 million bpd, and on the assumption that Aramco dividends normalize.
Mega-projects provide growth upside from 2020 onwards
The report suggested that planned mega-projects could add up to c2ppt to real non-oil GDP growth in the medium-term. The possible finalization of the Saudi Aramco-Sabic-PIF deal could unlock $69.1 billion of financing to the PIF. This could support a first phase of mega-projects. Authorities suggest the transaction would close in 2020, implying the growth impact of PIF's off-budget capital spending could start to be felt next year.
Authorities suggest that Aramco would fund the transaction through a) a cash payment of 50 per cent of the purchase price (adjusted for certain expenses) on the closing date; and, b) a seller loan in an amount equal to 50 per cent of the purchase price ($34.5 billion). The seller loan will be secured by two separate promissory notes issued by Saudi Aramco in favour of the PIF.
The loan will be payable in two equal tranches due on 31 December 2020 and on 31 December 2021, each equivalent to 25 per cent of the purchase price plus a loan charge of $0.25 billion ($17.5 billion). In the meantime, press reports suggest that the PIF is seeking to raise two syndicated loans of SR14 billion and $8-10 billion this year.
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