Fitch rates Saudi budget as ‘positive’ but warns of future budget deficits

Saudi Arabia’s 2016 budget has a number of reforms that rationalise state spending but falling oil prices could lead to more double-digit deficits for the country, Fitch Ratings noted in a new report.

The kingdom, which posted a budget deficit of $98bn in 2015, revealed an austere spending plan for 2016 that slashed state spending and predicted a realistic revenue forecast amidst low oil prices.

The government said that it will narrow down 2016’s budget deficit to SAR 326bn while reducing spending to SAR 840bn, down 2.3 per cent from 2015. In addition, officials also declared a hike in petrol and utility prices, plans to privatise assets, control public wage growth and create a debt management office to monitor spending.

Fitch said that the impact of these reforms on middle-income classes will depend on the pace and extent of implementation. But the agency pointed out that the country’s allocation of funds for unforeseen circumstances could be helpful.

“The 2016 budget for the first time includes an unallocated contingency reserve worth 22 per cent of budgeted spending to cover unforeseen expenditure,” Fitch Ratings said in a note.

“We assume that, without a significant rebound in oil prices, this will not be fully drawn down, making a further reduction in the gap between budgeted and actual spending plausible. It is unclear whether heightened tension with Iran will increase security costs.

“Concrete deficit financing plans were not in the budget, but Fitch assumes these will remain a combination of drawing down government assets held at the central bank and debt issuance, potentially including international issuance. Net foreign assets held by the central bank fell by $96bn over the first 11 months of 2015.

“The fiscal policy response to lower oil prices and evolution of fiscal and external buffers are key to resolving the Negative Outlook on Saudi Arabia’s ‘AA’ sovereign rating.”

With oil prices at an all-time low, Gulf countries are revising their spending plans. Many countries are also slashing fuel subsidies and increasing taxation to cope with the cheap oil era.