https://arab.news/4dadw
Moody’s has unpacked the likely impact of recently announced moves by the Saudi government to limit the impact of the pandemic, specifically through spending cuts, tripling value added tax (VAT) and canceling the cost of living allowance.
Such measures will help the government to offset a large portion of its expected revenue losses from sharply lower oil prices and production cuts. It is estimated that the government would likely generate SR120 billion (5 percent of GDP) in annual savings and another SR50 billion from the VAT hike and the cancelation of the cost-of-living allowance respectively.
The report goes on to look at the impact of canceling, extending or postponing some operational and capital expenditure to achieve spending cuts of SR100 billion — the equivalent of 4 percent of GDP.
Essentially the aim of these cuts is to limit the pace of fiscal deterioration by offsetting a large portion of expected revenue losses from sharply lower oil prices and production cuts.
The credit ratings agency points to the government’s willingness to prioritize structural budget improvements which in the long run will help to reduce the economy’s sensitivity to oil market fluctuations.
Based on Moody’s assumption of an oil price average of $35 per barrel this year and considering the production commitments in the mid-April OPEC+ agreement, it is estimated that in 2020, Saudi Arabia’s oil revenue will decline by nearly SR300 billion (12 percent of GDP) compared to 2019.
While this is undoubtedly a big number, it is worth noting that the full scale of the fiscal adjustment for this year will be reduced by higher health and other spending directly related to the social and economic impact of the pandemic.
Infact, this additional spending will likely amount to 1-2 percent of GDP.
Moody’s expects Saudi Arabia’s fiscal deficit to widen to more than 12 percent of GDP this year and more than 8 percent of GDP in 2021. That compares to 4.5 percent of GDP in 2019.
• Talat Zaki Hafiz is an economist and financial analyst.
* An earlier version of this opinion article published on June 3rd questioned whether an assessment made in a Moody’s report about the impact of VAT changes in Saudi Arabia allowed for a reduced impact in 2020. The same article also questioned whether the scale of planned fiscal adjustments considered the possibility of higher health and other spending. We would like to clarify that the Moody’s report had in fact considered and highlighted both of these factors.