$800 million New wave of Saudi spending

 Analyzing Saudi Arabia's Recent Surge in Spending and Its Economic Implications

In recent times, Saudi Arabia has embarked on a significant spending spree, marked by ambitious giga-projects such as the groundbreaking city, The LineNeom. While this surge in expenditure during the first quarter of 2023 has raised concerns over fiscal sustainability, experts assert that there remains leeway for further investments without causing undue alarm.

During this period, the Saudi government reported a deficit nearing SAR3 billion ($800 million), driven by a remarkable 29 percent upswing in spending. In contrast, revenue experienced only a marginal 1 percent rise. The primary contributor to this spending surge was the substantial increase in procurement costs, with capital spending soaring by an impressive 75 percent.

Of particular note, the growth in non-oil revenue was a noteworthy offset to the 3 percent decline in hydrocarbon revenue, which amounted to more than SAR178 billion. This augmentation in non-oil revenue, totaling more than SAR102 billion and driven by augmented VAT receipts and heightened taxes paid by foreign enterprises operating within the kingdom, has emerged as a key factor in managing the deficit.

James Reeve, the Chief Economist of Jadwa Investment, underscored that while the surge in spending does raise sustainability questions, there exists a certain capacity for additional government outlays in the current year and the foreseeable future. Reeve highlighted that the share of spending in relation to non-oil GDP has actually decreased from approximately 55 percent to 30 percent over the past decade. This decrease offers room for expanded external borrowing to sustain fiscal financing, even in the face of limited domestic banking liquidity.

Reeve further explained, "The country is in the midst of an economic transformation, and it is natural that the state should take the lead, both in investment and in providing support to those impacted by the transition. In time, it is expected that the private sector will increase investment – indeed, this is already happening."

Jadwa Investment forecasts higher-than-expected spending throughout the year, complemented by decent growth in non-oil revenue driven by increasing consumption and subsequent tax receipts. However, a cloud of uncertainty hangs over oil revenue due to an estimated 500,000 barrels per day reduction in Saudi production from May onwards, as part of a broader OPEC+ agreement.

Nonetheless, the landscape has been altered by Aramco's decision to initiate performance-related dividends, likely starting from early 2024. This positive development could contribute an additional 2 percent of GDP to the government's revenue, potentially mitigating the impact of reduced oil revenue.

As Jadwa data indicates, despite a 3 percent decline in the government's oil income during Q1 when compared to the same period in 2022, the decline should have been more substantial, around 20 percent, given the variations in crude pricing and production. The underlying explanation points to higher refining margins and increased refining capacity, which bolstered oil revenues.

In sum, while concerns about the Saudi government's recent surge in spending are valid, economic experts argue that the nation's ongoing economic transformation and strategic initiatives provide a rationale for these expenditures. The evolving landscape, coupled with potential improvements in oil revenue and the commitment to sustainable economic development, could lead to a balanced fiscal outlook in the longer term.