Record public spending in Saudi Arabia expected in 2019, along with continued support for the private sector

Saudi Arabia’s budget for 2019 set a record-high expenditure level of SR1.11trn ($295.9bn), a rise of SR76bn ($20.3bn) over the previous year. The expansionary stance means the government is able to boost its current spending, which rose by 4% to SR860bn ($229.3bn), and thereby maintain its commitment to education, health care and social benefits. Capital spending, meanwhile, is the principal focus of the business community, which has come to equate government outlay with economic growth and investment opportunities. This is set to reach SR246bn ($65.6bn) in 2019, a 20% increase over SR205bn ($54.7bn) in 2018.

Private Stimulus

The capital spend will support a range of initiatives being pursued under a SR200bn ($53.3bn) private sector stimulus plan. The details of the first phase, worth SR72bn ($19.2bn), were announced in December 2017 by King Salman bin Abdulaziz Al Saud. Running the course of 2018, the first package comprised 15 initiatives across sectors such as manufacturing, housing and exports. The housing programmes accounted for a significant portion of overall spending, and included a SR21.3bn ($5.7bn) residential loan scheme aimed at addressing the lack of finance options for home purchases – part of a wider initiative to boost the country’s home ownership level from 47% in 2017 to 70% by 2030. A further SR14bn ($3.7bn) was set aside for efficient building technology projects. Between them, the two initiatives accounted for just under half of the total stimulus package for 2018. This is a clear demonstration of the government’s determination to support the housing and construction sectors, both of which have been adversely affected by the lower oil price environment since 2015.

Other initiatives slated for the first round of stimulus included SR2.8bn ($746.5m) to support small and medium-sized enterprises (SMEs) and venture capital projects, which are a key focus area of the nation’s long-term development plans. A further SR7bn ($1.9bn) was provided to reimburse SMEs for government fees paid during the first three years of their operation, applicable to all such firms launched since 2016. The repayment covered 80% of the expat levies paid by SMEs for three years, a decision that directly addressed one of the most contentious issues in the private sector. Companies were asked to pay a SR300-400 ($80-107) monthly fee for each non-Saudi employee beginning January 1, 2018, but the Council of Saudi Chambers lobbied the government to remove this requirement for smaller firms. The repayments offered by the government are to support young companies as they work to play a larger role in the new economic environment.

At the other end of the commercial spectrum, the first phase of the stimulus package also provided SR10bn ($2.7bn) for mega-projects undertaken by the private sector, SR5bn ($1.3bn) for an export bank and a further SR5bn ($1.3bn) for an investment programme.

Balancing the Budget

The elevated capital spending in the 2019 budget has been well received by the business community. Growth in the non-oil sector remains sensitive to government spending levels, with higher capital outlay generally resulting in increased demand for services in some of the largest sectors of the economy. However, investment in capital projects is usually tied to the price of oil: when the 2018 budget was published, the IMF estimated that crude prices would have to average $88 per barrel for the Kingdom to balance its revenues and expenses that year. Analysts estimate a breakeven price of at least $84 per barrel to pay for the spending contained in the 2019 budget, but Brent crude had not yet broken the $70 barrier in the first two months of the year.

While oil prices are still a large piece of the economic picture, fulfilling the Vision 2030 strategy for social and economic development emphasises kick-starting the private sector as an alternative engine of growth, which would in turn release pressure on the government’s spending bill. Increased private participation will be crucial to certain budget categories over the long term.