Saudi Arabia's budget deficit forecast to fall to $86bn in 2017

BofA Merrill Lynch research note says deficit will narrow on back of higher oil prices, discipline in spending and non-oil revenue measures

Saudi Arabia's deficit is set to narrow during 2017 on the back of higher oil prices, discipline in spending and non-oil revenue measures, according to a new research note by Bank of America Merrill Lynch.

BofA Merrill Lynch said it sees the 2017 budget deficit at SR316 billion ($85 billion), about 12 percent of the Gulf kingdom's GDP, compared to a deficit of SR402 billion in 2016, which represented 16.9 percent of GDP.

The research note said underlying spending discipline kept the 2016 fiscal deficit in line with budget targets. However, the repayment of contractor arrears (SR80 billion) and spending related to surplus projects (SR25 billion) drove the 2016 fiscal deficit wider.

BofA Merrill Lynch also noted that the Saudi US dollar peg will hold in 2017 given sizeable foreign assets and the experience with implementing multi-year fiscal adjustments.

It added that it expects liquidity in Saudi Arabia to improve and that non-oil sector growth should rebound "given a gradual pace of fiscal tightening".

The research note said the country's budget statement and medium-term program imply three Saudi policy priorities this year - easing near-term austerity, supporting higher oil prices and introducing non-oil revenue reforms.

The 2017 budget suggests flattish real spending, along with further repayment of government arrears in the first quarter of 2017, it added.

BofA Merrill Lynch said it sees the budget being consistent with oil prices of $55 per barrel and a fiscal breakeven of $98 per barrel.

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