Reduction in Q1 Saudi budget deficit due to capex cut - analysts

IMF says 2021 budget deficit to fall to 4.2%, better than forecast

Cars drive past the King Abdullah Financial District in Riyadh, Saudi Arabia December 18, 2018. Image used for illustrative purpose.

Cars drive past the King Abdullah Financial District in Riyadh, Saudi Arabia December 18, 2018. Image used for illustrative purpose.

REUTERS/Faisal Al Nasser

Saudi Arabia last week reduced its budget deficit to 7.4 billion riyals ($1.97 billion) for the first quarter of the year, nearly 80 percent less than the deficit recorded in Q1 of last year. Spending amounted to 212.2 billion riyals, while revenues totalled 204.76 billion riyals during the quarter.

According to the kingdom's finance ministry, the reduction came as the government reaped the benefits of consolidation measures introduced last year.

In its annual budget, Saudi Arabia said it would cut spending 7.3 per cent in 2021 to 990 billion riyals while raising revenue to rise to 849 billion riyals.

The International Monetary Fund said it expects the kingdom's fiscal deficit to fall to 4.2 percent of GDP this year, slightly lower than the budget forecast.

Here's what analysts have to say about the decline in budget deficit.

Moody's Investor Services: Although this improvement was largely driven by higher oil prices and a large seasonal drop in spending, the budget performance figures also reveal a structural improvement evident in the decline in the non-oil fiscal deficit to the lowest level in more than six years, a credit positive.

The structural improvement was mainly a result of the tripling of the value added tax (VAT) rate to 15 percent last July and a nearly 50 percent cut in capital expenditure so far this year, in line with the approved 2021 budget. The structural improvement reduces the fiscal exposure to fluctuations in global oil demand and prices.

If sustained, it will also help reverse part of the fiscal deterioration that took place last year as a result of the coronavirus shock and arrest a further significant deterioration in the government's balance sheet.

Jadwa Investment: Q1 saw a modest fiscal deficit of 7.4 billion riyals. Looking ahead, considering our forecasted full year fiscal deficit of 102 billion riyals (-3.3 percent of GDP), Jadwa expects the deficit to be sizably larger in the next three quarters of the year.

The decline in government expenses was wholly a result of lower capital expenditure, which dropped by a sizable 47 percent year-on-year, whilst current expenditure showed no change.

Looking ahead, Jadwa Investment expects a pick-up in outlays on development projects during the remainder of the year, particularly on Vision Realization Programs, to raise capital expenditure.

Emirates NBD Research: Current spending was broadly unchanged, but capital spending was almost 47 percent lower year-on-year the first quarter of the year.

The 2021 budget plan sees capex slashed by one-third from last year, but this should be offset by increased investment by the Public Investment Fund.

Emirates NBD expects Saudi Arabia's budget deficit to narrow to -1.4 percent of GDP this year from -11.2 percent in 2020.

(Writing by Brinda Darasha; editing by Seban Scaria)

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