Saudi budget is vital first step in balancing act

A journey of a thousand miles begins with one step, the old saying goes, and Saudi Arabia’s 2017 budget should be seen as the first step along the path set out in the two key strategy documents of the year — the National Transformation Plan and the Vision 2030 plan. 
As such, it is no exaggeration to say that this is arguably the most important budget statement in the Kingdom’s history.
The transformation underway will be profound in economic, political and social terms. But it will be measured by financial progress, because it is at heart a financial challenge: how to reduce the dependence on oil revenues before lower oil prices eat so deep into financial reserves that the country’s capital is exhausted. 
The harsh reality is that Saudi Arabia must try to balance its budget in the new era of low oil prices, or risk running out of cash.
This might have seemed an impossible task two years ago when crude was plummeting and the national accounts were hemorrhaging, but the 2017 budget statement gives some confidence this will be possible. It restates the goal of having a balanced budget, which means the elimination of the deficit, by 2020.
This is all important. The sooner the Saudi economy behaves like a normal one — avoiding using the capital account while taking measures to optimize its current account — the better.
The measures implemented last year to reduce spending have been rather more efficient than imagined, as have been the Kingdom’s forays into the international markets, with the result that the final figure for the deficit in 2016 will be just short of SR 300 billion ($80 billion) — a big improvement on what should turn out to be the high-watermark deficit of SR 366 billion the previous year.
Total debt this year will be an estimated SR 316.5bn, or some 12.3 per cent of projected gross domestic product (GDP). That is still comparatively high for an emerging economy, but lower than some of the gloomier forecasts.
One very significant line in the statement is that the total value of debt instruments issued in the course of 2016 was just over SR 200 billion, illustrating the ease and regularity with which Saudi Arabia has been able to tap into international financial markets. That is another step towards becoming a “normal” economy.
These capital raising initiatives will continue, and will be enhanced, in 2017 and beyond. The budget statement gives the parameters for debt management leading up to 2020, with the proviso that debt must not exceed a fairly comfortable level of 30 percent of GDP, while retaining a credit rating of AA2 for the Kingdom.
More bond issues like the record-breaking $17.5 billion issue earlier this year are imagined, as and when market conditions allow. The government will tap the domestic, regional and international markets for Islamic bonds (sukuk), and will vary the denomination of bond issues — a very practical measure in the era of rapid dollar appreciation. 
The projections for 2017 also represent a significant step towards deficit elimination. Based on a conservative estimate of oil prices ($50) and the usual mean calculations of global growth from the International Monetary Fund (3.4 percent in 2017), total revenues are expected to reach SR 692 billion next year, 31 percent better than was anticipated 12 months ago.
The oil price recovery accounts for the bulk of this increased revenue, but even the much-criticized non-oil economy is expected to grow significantly.
Against this income, expenditure is still expected to rise. Estimated at SR 890 billion, that is 8 percent higher than last year. But the itemized details of the expenditure give some fascinating insight into Saudi Arabia’s new priorities.
Public administration costs will be held steady at around SR 26 billion, but military expenditure will be reduced significantly from SR 205 billion to SR 190 billion. Security and regional administration costs will also be cut, from SR 100.5 billion to SR 96.7 billion.
The social side of the economy — municipality services, health and social development, infrastructure and transport, and public programs — will be allocated more next year. Government-funded education will be shaved, from SR 205.8 billion to SR 200.3 billion.
It is worth noting too that the NTP itself has a considerable budget, with SR 268 billion allocated to be spent in the four years of its duration. Of this, only some SR 51 billion has already been spent or is allocated for 2017.
Further streamlining of the Kingdom’s financial infrastructure will also be undertaken in the run up to 2020, all aimed at increasing transparency and efficiency according to international best practice.
All this is commendable progress, but of course there will be challenges, not least the need to get continued buy-in from Saudi citizens that the economic transformation envisaged by policymakers is the correct one.
But the 2017 budget makes the case persuasively that the country is on the right track towards economic diversification and transformation. It is a significant and impressive first step.