Saudi Arabia considers cutting energy subsidies to manage budget deficit

Saudi Arabia spends about US$37 billion per year on energy subsidies, or about 4.6 per cent of GDP, according to IMF estimates.

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Saudi Arabia is considering cuts to energy subsidies as it seeks ways to tame its burgeoning budget deficit.

The oil minister Ali Al Naimi, who has managed the kingdom’s energy policy for 20 years, said that allowing energy prices to rise was currently “under study” by the Saudi government.

It is the first time that Saudi cuts to energy subsidies have been mooted in public since oil prices began since oil prices started fall last year.

The Tadawul All Share Index fell 3 per cent yesterday, the most since August.

Saudi Arabia spends about $37 billion per year on energy subsidies, or about 4.6 per cent of GDP, according to IMF estimates.

But the fall in the oil price has grown its budget deficit to 21.6 per cent of GDP this year, falling to a predicted 19.4 per cent of GDP next year. At this rate of spending, and without further action, the kingdom will run out of financial reserves in five years, the IMF has warned.

Saudi Arabia, which earns 90 per cent of government revenues from oil, has been hit by a drop in crude prices from $110 in June 2014 to $47 yesterday. That has led to a 22 per cent decline in government revenues. It needs an oil price of about $105 per barrel this year to cover its spending.

“This adds to this growing sense that Saudi authorities are starting to realise that fiscal policy needs to tighten,” said William Jackson, a senior emerging markets economist at Capital Economics.

“The fact that this is being discussed in the open is quite new for Saudi Arabia. They may well be looking at some of the points raised by the IMF, who said that their fiscal plans just aren’t transparent enough. That is a positive step.”

But history suggests that capital expenditure will bear the largest burden – not cuts to consumption subsidies or the raising of revenue through new taxes, Mr Jackson said. During the last oil rout, in the 1980s, the Saudi government made huge cuts to capital expenditure, while leaving spending that directly benefited citizens untouched.

The Saudi government has indicated that it will cut spending on infrastructure in its 2016 budget, while one-off grants to Saudi nationals on the accession of King Salman will not be repeated next year.

Countries across the region have examined or introduced changes to energy subsidy regimes.

Abu Dhabi increased tariffs for electricity and water in January, while fuel prices rose nationwide in August as the government reduced petrol subsidies. Bahrain increased fuel prices for industrial users this year, and said that it was considering ending a range of consumption subsidies for expats.

The kingdom has financial reserves of about 100 per cent of GDP, but has sold foreign reserves and tapped local bond markets, while its sovereign wealth fund has sold assets in a bid to generate enough cash to plug the deficit.

Sama Foreign Holdings, the kingdom's sovereign wealth fund, has sold up to $70 billion of assets as it seeks to plug the gap in spending, the Financial Times reported last month, while Nasdaq estimates that it has sold a further $1.8bn of its European equity holdings. Saudi Arabia is scheduled to offer $27bn in debt to local markets by the end of the year.

Saudi Arabia has plenty of options when funding its deficit, however, because of low public and private debt, local banks that have plenty of liquid assets, and relatively large reserves, Mr Jackson said. “So long as reserves are invested in liquid assets, there shouldn’t really be a cash flow issue,” he said. “There will be more difficulty if these reserves are run down and then Saudi sells off-balance sheet stakes – equity stakes in companies, for instance. Saudi’s debt-to-GDP ratio is also very low, and the country can issue a fair amount of debt domestically without putting undue pressure on banks.”

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