Saudi Arabia’s more realistic, tight-fisted budget for 2016 envisages scaled-back revenue expectations amid a 60% plunge in global oil prices. The government’s policy direction points to lower spending on subsidies with its finances also strained by its lead involvement in the Yemen conflict.
Saudi Arabia posted a record $98bn budget deficit in 2015 (about 16% of gross domestic product), the Finance Ministry said. Revenues were estimated at 608bn riyals ($162bn), well below projections and 2014 income, while spending came in at 975bn riyals ($260bn). About 73% of this year’s revenue came from oil, down 23% from 2014 and below the 715bn-riyal target.
This year’s budget deficit, the second in a row, is the highest in the history of Saudi Arabia, the world’s largest oil exporter, but was not as big as some expected. The International Monetary Fund had projected the 2015 deficit to be around $130bn, while other reports also put it above $100bn.
The government forecasts the deficit will narrow to 326.2bn riyals ($87bn) in 2016, from 367bn riyals this year. The kingdom has seen a sharp drop in revenues as oil prices have fallen by more than 60% since mid-2014 to below $40 a barrel. Public revenues are the lowest since 2009, when oil prices dived as a result of the global financial crisis.
Crude’s slump, the result of the Organisation of Petroleum Exporting Countries’ (Opec) decision to keep pumping and defend market share against rivals, is having a profound impact. Opec members will see $500bn revenue shortfall this year, according to the International Energy Agency, putting intense pressure on national budgets. About $1.3tn has been wiped off the value of oil companies around the world over the same period.
The Saudi Ministry of Finance said its 2016 budget is based on “extremely low oil prices” (estimated to be based on a $37 a barrel for Brent oil) that prompted Gulf states to cut spending. The government, headed by King Salman, pledged to take action to shore up public finances, including the possible sale of government entities and the revision of fuel, water and power subsidies over the next five years. It immediately rolled out the first batch of revisions after the budget announcement, raising the prices of water and electricity supplied to households and the cost of gasoline, ethane and gas.
The revisions focused on “directing subsidies to those who really deserve it,” said Economy Minister Adel Fakeih.
Saudi spending reforms point to “… a good path to fiscal reform. Markets will probably be pleased. The IMF had been projecting a bigger fiscal deficit than was actually the case in 2015. So it seems the levers of fiscal discipline were put into action in the second half of this year, rather than waiting,” says John Sfakianakis, regional director, Ashmore Group, Riyadh.
Opec leader Saudi Arabia’s budget proposals, revenue projections and willingness to rein in subsidies to tame a record deficit are policies in the right direction. More so, as oil producers are digging in to face a prolonged low-oil-price regime.