Saudi Arabia runs 2015 deficit to meet spending

07 October 2015

Deficit is expected to decline as one-off spending ends and infrastructure is completed

$660bn

Saudi Arabia financial reserves

$103

2015 Government budget breakeven oil price

Saudi Arabia is expected to run a government fiscal deficit of 19.5 per cent of its GDP in 2015.

The IMF expects the deficit to decline in 2016, as one-off spending ends and large investment projects are completed, but the fiscal deficit is forecast to remain high over the medium term.

The current account of the kingdom’s central bank, Saudi Arabian Monetary Agency (Sama), is expected to fall by almost 9.8 per cent in 2015 to $659.8bn, from the $716.7bn recorded in 2014.

This, however, would still be higher than the current account running up to 2012.

Government debt is still very low, at 1.6 per cent of GDP at the end of 2014. The current account surplus declined to 10.9 per cent of GDP in 2014 and the IMF expects this to move into a small deficit in 2015, but return to a surplus during 2016-20.

The drop in oil prices has increased the importance of the government pushing through structural reforms, to switch growth and employment of nationals towards the private sector.

Despite efforts to diversify its economy, Saudi Arabia is still highly reliant on oil export revenues to fund its annual budget.

Many observers expected Riyadh to adapt and factor in the prevailing economic conditions. However, a historically high budget of $229bn was set for 2015, with expected revenues of only $190.7bn.

On top of the low oil prices, Riyadh has committed to a long-term military offensive in Yemen, adding to pressure on the government’s budget.

The Saudi government plans to float sukuk (Islamic bonds) this autumn to finance its record budget deficit, while Riyadh is also preparing to float up to $27bn-worth of bonds in the final quarter.

Riyadh issued its first $4bn in local bonds in July – the first sovereign issuance since 2007.

Measuring the financial buffers that can be used by Riyadh to mitigate the effects of low oil prices is complex, as the government has an array of overseas assets.

Saudi Arabia started drawing down its foreign currency reserves in February 2015, with the central bank’s net foreign assets reporting the first drop since February 2010.

Sama reported that the country’s net foreign assets fell by 2 per cent in June, with the government spending down reserves for the fifth straight month. Net foreign assets fell to $664.4bn, having fallen by $72.6bn from an all-time high in August 2014.

“If you start at the beginning of this year the government had deposits in the banking system of around 55 per cent of GDP, and its government debt was paid down to about 1.5 per cent of GDP,” said the IMF’s mission chief to Saudi Arabia, Tim Callen, in a September conference call. “So, if I look at how long it would take me to run through the deposit in the banking system, I would probably be looking at… four or five years using the deficit parts that we have in report.

“They are already beginning to tap their ability to borrow as well, given their very low debt levels at the moment. So, it seems they could borrow to 60, 70 per cent of GDP, then that will clearly extend the horizon which they would last,” he added.

Saudi Arabia20142015f2016f2017f
Fiscal breakeven oil price111.310398.3na
Nominal GDP ($bn)777.9805.2839.8876.6
Real GDP growth (annual change, %)4.64.54.44.4
Government revenue (% of GDP)45.343.241.439.7
Government total expenditure (% of GDP)4041.641.141
General government gross debt  2.62.52.42.3
Current account balance (% of GDP)15.112.410.99.5
Inflation (%)3.23.33.53.5
f=Forecast; na-Not available. Sources: IMF; World Economic Outlook Database

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