Saudi Arabia’s fiscal deficit to widen

Financial markets had feared the kingdom might cut spending sharply, but the plan suggests Saudi authorities are confident of their ability to ride out a period of low oil prices and see no need for major austerity.

Saudi Arabia’s budget announcement is eagerly awaited by financial markets it provides an insight on how Saudi Arabia intends to handle the economic impact of this year’s oil price plunge. Jamal Nasrallah/ EPAShow less

Saudi Arabia predicts its fiscal deficit will grow to 145 billion riyals (Dh142bn) next year, a gap of 20 per cent, as the kingdom maintains its spending plans despite lower revenue as oil prices fall.

Next year’s revenue is forecast to fall to 715bn riyals from 1 trillion riyals this year, with expenditure expected to reach 860bn riyals next year, according to figures published by the Saudi ministry of finance yesterday.

Actual expenditure this year hit 1.1tn riyals, 29 per cent above the ministry’s target of 855bn riyals, resulting in a difference of 245bn riyals and a fiscal deficit of 3.6 per cent.

Riyadh would continue to invest in developing the kingdom’s education, health, security, transport and infrastructure sectors, the ministry said yesterday.

It would also lower public-sector wages, which make up about 50 per cent of government expenditure.

Low oil prices have reduced government revenues, as the price of benchmark Brent crude fell to $59 a barrel on December 18 from the peak of $110 a barrel in July.

Saudi Arabia’s break-even oil price, the price of oil at which government revenue equals planned expenditure, is close to $85 a barrel, according to Standard & Poor’s, the credit ratings agency that recently upgraded its credit outlook for Saudi Arabia to positive from stable.

Oil revenue accounts for 91 per cent of Saudi government revenue, according to S&P.

According to a former economic adviser to the government, the budget was drafted based on an oil-price assumption of $80 a barrel, and would be viewed as a sign of confidence in the market.

John Sfakianakis, a former chief economic adviser to the ministry of finance, told Bloomberg News yesterday that “everyone was expecting to see a budget built on a price around $60 [a barrel] but that would have sent a negative message to the oil market”.

“With a fiscal break-even price of $80 a barrel, the government is sending a message to the market that we are expecting to see a rebound in oil prices,” he said.

The kingdom’s large holdings of foreign currency reserves and assets held by its sovereign wealth funds will insulate the country from the immediate impact of lower oil prices.

Its financial reserves are equivalent to about 100 per cent of its GDP.

SAMA Foreign Holdings, a Saudi sovereign wealth fund, has $737.9bn in assets under management, according to the Sovereign Wealth Fund Institute, making it the world’s fifth-largest such fund.

Saudi Arabia also operates the Public Investment Fund, with $5.3bn in assets, and established the Hassana (which means “Immunity”) Investment Company in 2009. The finance minister, Ibrahim Alassaf, told the media yesterday the government would continue spending actively on economic development projects “over the medium term... three to five years”.

“We have the ability to endure low oil prices over the medium term,” he said.

Opec decided on November 27th not to cut production despite a glut of supply, which sent equity markets across the Middle East reeling. The decision was the result of lobbying by Saudi Arabia, as Ali Al Naimi, the Saudi oil minister, persuaded convinced Opec members that cutting supply was not in their best interests.

Median forecasts for the price of Brent crude show that oil prices are expected to rise to about $65 a barrel next year, and $71 a barrel in 2016, according to data from Bloomberg.

On forward markets, prices for 2015 crude are expected to rally slightly, with prices for one-year forwards on WTI crude at $62.75 per barrel, up from current WTI futures prices of $55.84 per barrel.

An oil price of $60 a barrel would mean that “the Gulf economies, which should be able to weather a period of lower oil prices without making big spending cuts, could even run a small current account deficit in the coming years. This would be the first time they have done so since 1998”, said Jason Tuvey, an emerging-markets economist at Capital Economics.

He estimated that Saudi Arabia could run a current account deficit of about 2.5 per cent of GDP next year, in addition to its fiscal deficits, if oil prices stabilise at $70 per barrel.

Saudi Arabia is not the only Arabian Gulf state feeling the fiscal pinch as oil prices fall.

Iraq this week published its budget for next year; it is set to cut spending by $43bn to about $100bn, albeit with a deficit of 23 trillion dinars (Dh73.6bn).

Kuwait in October cut its budget by 18 per cent, leading to a $45bn budget surplus against a total expenditure of $64.6bn.

In the UAE, the FNC this week approved a Dh49.1bn federal budget for next year, Dh2.9bn more than this year’s budget.

Abu Dhabi contributed Dh1.7bn, while Dubai contributed Dh1.2bn.

Abu Dhabi and Dubai have yet to publish their budgets for next year.

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