Gulf News - - Business - BY BABU DAS AU­GUS­TINE Bank­ing Ed­i­tor

audi Ara­bia is ex­pected to wit­ness a big spike in gov­ern­ment bor­row­ings in 2019, thanks to its ex­pan­sion­ary bud­get and sig­nif­i­cantly higher fis­cal break-even oil prices ac­cord­ing to econ­o­mists.

The king­dom’s 2019 bud­get projects a deficit of around 4 per cent of GDP. To­tal spend­ing is bud­geted to in­crease by 7.3 per cent from the es­ti­mated fig­ure of last year.

Un­like 2018, most of the in­crease in spend­ing will be al­lo­cated to pub­lic in­vest­ment. The bud­get ex­pects a rise in oil rev­enues of 7.4 per cent, which im­plies that Brent oil prices should av­er­age $77 (Dh282.82) per bar­rel in 2019 (as com­pared with $72 in 2018).

Econ­o­mists be­lieve that the oil price as­sump­tions are too op­ti­mistic un­der the cur­rent mar­ket con­di­tions and Saudi Ara­bia will need to re­sort to both do­mes­tic and in­ter­na­tional bor­row­ings. “Un­der our as­sump­tions of Brent oil prices av­er­ag­ing $65 in 2019 and [Saudi] Aramco’s trans­fers to the bud­get re­main­ing around 70 per cent of oil ex­port earn­ings, then the deficit would slightly ex­ceed 8 per cent of GDP,” said Gar­bis Ira­dian, In­sti­tute of In­ter­na­tional Fi­nance (IIF) chief econ­o­mist for the Mena re­gion.

“We ex­pect the [Saudi] au­thor­i­ties to con­tinue tap­ping do­mes­tic and for­eign debt sources to fi­nance the fis­cal deficits.”

Many an­a­lysts say the bud­get deficit could be much higher than pro­jected, with some an­a­lysts fore­cast­ing that it could be in the range of 7 to 9 per cent. Given its huge bud­geted fi­nanc­ing needs, an­a­lysts say Saudi Ara­bia is likely be less sen­si­tive to pric­ing. “Given the op­ti­mistic rev­enue pro­jec­tions, the [Saudi] gov­ern­ment will need ei­ther to raise its deficit pro­jec­tions or lower spend­ing and re­vise down its GDP growth fore­cast,” said Ziad Daoud, chief Mid­dle East econ­o­mist at Bloomberg Eco­nomics. “We ex­pect the gov­ern­ment to opt for higher spend­ing at the ex­pense of miss­ing its deficit tar­get.”

Saudi au­thor­i­ties recog­nise the need for is­su­ing more bonds. Au­thor­i­ties said in mid­De­cem­ber that the gov­ern­ment

Al­most all the paper was bought by for­eign in­vestors, with US-based buy­ers in par­tic­u­lar snap­ping up 40 per cent of the bonds due in 2029 and 45 per cent of the notes due in 2050. An­a­lysts said the dis­play of strong mar­ket con­fi­dence in Saudi bond is­suances last week and the like­li­hood of the US Fed­eral Re­serve paus­ing its rate hikes has in­creased the pos­si­bil­ity of more is­suance by Saudi gov­ern­ment and gov­ern­ment-re­lated en­ti­ties in the near fu­ture.

Re­ports sug­gest that Aramco is pre­par­ing for a $10 bil­lion bond is­suance sched­uled for the sec­ond quar­ter of this year to fund its planned ac­qui­si­tion of petro­chem­i­cals gi­ant, Saudi Ba­sic In­dus­tries Corp (Sabic).

Aramco is in talks to buy a 70 per cent share in Sabic from the Pub­lic In­vest­ment Fund, which could cost about $70 bil­lion.

Larger fi­nanc­ing needs im­ply an in­crease in the an­nual in­cur­rence of debt, a weak­en­ing as­set po­si­tion, or both, for Saudi Ara­bia.

Econ­o­mists be­lieve Saudi Ara­bia has ad­e­quate fis­cal space to con­tinue with an­other year char­ac­terised by a more loose fis­cal stance to boost non-oil growth ac­tiv­ity.

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