2016 Budget

The government’s budget for the 2016 fiscal year (31 December 2015 to 30 December 2016) was endorsed by the Council of Ministers on 28th December. It points to a sustained commitment in maintaining a high level of spending despite the sustained environment of lower oil prices (Figure 1). Despite being reduced slightly, budgeted spending is set to play a vital role in supporting the economy in 2016. The highlights include: 

• The government has reaffirmed its commitment to support the economy by budgeting for a SR326 billion deficit in nominal terms, based on revenues of SR514 billion and expenditures of SR840 billion. The deficit will continue to be financed using a combination of Saudi Arabian Monetary Agency’s (SAMA) huge stock of net foreign assets, and domestic debt. SAMA net foreign assets totaled $640 billion at the end of October, while public debt rose from a long-term low of SR44.3 billion in 2014 to reach  SR142 billion in 2015, yet still low relative to GDP at 5.8 percent. 

• Despite the global environment of lower oil prices, the Kingdom has maintained a high level of spending in the 2016 fiscal budget. Education and healthcare remain the focus of government spending, accounting for 35 percent of total spending. Whilst spending on military and security services constitutes the largest single share at 25 percent. A new allocation accounting for 22 percent has been introduced to support the budget and help address shortages in revenue we estimate that budgeted investment spending has been reduced to SR204 billion in 2016, with spending on key social infrastructure projects maintained. This points to a gradual consolidation in the fiscal stance but also shows the government’s sustained commitment on maintaining a high level of spending on human capital and social infrastructure.

• The budgetary performance in 2015 came up close to our expectations with a deficit of SR367 billion, or 15 percent of GDP (Jadwa Investment forecast is SR403 billion, 16.4 percent of GDP). Despite the deficit being the largest on record, reduced spending has meant a much smaller than anticipated deficit. This is the second consecutive fiscal deficit, and was mainly due to both a steep fall in revenues and a rise in one off expenditures associated with the royal succession. Total revenue fell by 41.5 percent compared to the previous year, reaching its lowest level since 2009 at SR608 billion. We estimate oil revenue to have fallen by 51 percent despite record production (10.2 mbpd year-to-November). Fiscal expenditure was reduced for the first time since 2002 to reach SR975 billion, SR136 billion lower than 2014.

• In line with our expectations, preliminary economic data shows that the economy continued to slow in 2015 with real GDP growth of 3.4 percent (Jadwa Investment forecast: 3.2 percent). Non-oil private sector slowed to 3.5 percent year-on-year (Jadwa Investment forecast: 3.8 percent), with the highest growth in the transport, construction, and wholesale and retail sectors. Lower oil export revenues meant a first current account deficit since 1998, at 6.3 percent of GDP or minus $41.3 billion.

• Looking ahead, a National Transformation Program (NTP) will likely be announced by the government in January, providing a roadmap for major social and economic initiatives to be undertaken in the next five years. We have already seen some elements of these major initiatives announced today along the budget such as domestic energy price reform which should have a positive impact on non-oil revenue while at the same time curb the growth in energy consumption.

We estimate a price of 40.3 pb for Saudi export crude (around $42.8 pb for Brent) and production of 10.2 million barrels per day (mbpd) are consistent with the revenue projections contained in the budget. We expect both revenues and expenditures in 2016 to be above the budgeted level, but the differential will be smaller as the government becomes more prudent in its spending procedure. We forecast a budget deficit of SR313 billion (12.6 percent of GDP) based on oil price of $47 pb for Brent in 2016..