SAUDI ARABIA’S DEFICIT TO NARROW AS OIL RISES

▶ Budget expected to return to balance by 2024 as deficit shrinks

Saudi Arabia’s fiscal deficit will narrow at a robust pace over the next two years to reach 3.9 per cent of gross domestic product in 2019, as higher oil proceeds boost the kingdom’s income, according to a report.

Oil income, which accounted for 63 per cent of state revenues in 2017, is set to rise this year after oil prices hit more than a three-year high of $80 per barrel, BMI Research said yesterday.

Oil production levels are also forecast to expand in the second half of this year and into 2019, following the Opec decision last month to raise output, which had been capped since January 2017 to prop up prices.

BMI upwardly revised its deficit forecast for Saudi Arabia to 5.6 per cent of GDP this year, compared with 6.1 per cent of GDP previously, owing to upward revisions to its oil price forecasts.

The kingdom’s budget deficit is forecast to shrink to 3.9 per cent of GDP in 2019, down from 9.3 per cent of GDP in 2017. The budget is expected to return to balance by 2024, BMI said.

The International Monetary Fund said it expected the Saudi fiscal budget to narrow to 4.6 per cent of GDP this year and further to 1.7 per cent of GDP in 2019.

Saudi Arabia, the world’s biggest oil exporter, began tightening its purse strings in 2016 to help narrow its fiscal deficit, which reached a record 367 billion riyals (Dh359.41bn) in 2015 in the wake of plunging oil prices. But fiscal consolidation efforts, which included increasing energy prices and freezing public sector salary hikes, have curbed Saudi Arabia’s economic growth.

Last year the kingdom unveiled an expansionary budget for 2018 with 978bn riyals in expenditures, a 5.6 per cent increase from 2017.

The kingdom is also implementing an economic overhaul plan and reforms under the 2020 National Transformation Programme and its over-arching Vision 2030 agenda to help wean the country off oil income and create new revenue streams.

Saudi Arabia is likely to keep tapping the debt markets to finance its deficit, given its low debt-to-GDP ratio.

“Over the coming years, we expect the government to keep relying on domestic and international debt markets to finance its deficit, rather than deplete its foreign reserves,” BMI said. “This will result in an increase in the government’s debt-to-GDP ratio, from 17.2 per cent of GDP in 2017 to a forecast 32.4 per cent in 2022.”

However, the government is likely to take advantage of higher oil revenue to increase spending, partly offsetting these revenue gains and slowing the pace of deficit reduction, it added.

The IMF on Tuesday urged Saudi Arabia to accelerate its privatisation programme and warned against slowing the pace of its economic reforms as oil prices recover.

emerging market status. In January, the Saudi Capital Market Authority made it easier for international investors to buy publicly-traded companies by halving the minimum requirement of qualified foreign investors to $500 million from $1 billion.

As well as introducing T+2 settlement, which means that securities settle two days after they are bought, the CMA has also introduced Nomu, a parallel market for qualified investors.

It has also enabled securities borrowing and lending, and the adoption of International Financial Reporting Standards for companies that are listed.