Iran-linked oil spike will ease Saudi fiscal pressure

Significance

The first quarterly budget report for 2018 issued by the Ministry of Finance shows oil revenue is already resurging. The introduction of value-added tax (VAT) in January has also had an immediate impact on non-oil revenue, which increased by almost one-third compared with the first quarter of 2017, further improving Riyadh’s financial position. Nevertheless, a more open approach to budget reporting has highlighted the financial burden of military spending -- driven by the perceived proxy conflict with Iran in Yemen.

Impacts

• The introduction of VAT has led to an increase in inflation, which is likely to hurt business sentiment.
• Companies will struggle to adjust to increased costs arising from cuts in energy subsidies and limitations on foreign worker recruitment.
• The government will continue to delay efforts to control wage costs and rising outlays on social benefits.
• Progress with the sale of a stake in Saudi Aramco, the state oil firm, may further improve fiscal transparency.