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Sat 16 Jan 2016 11:04 AM

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Fitch applauds Saudi plan to tackle growing budget deficit

Ratings agency says it is unclear whether spat with Iran will further increase pressure on security budget

Fitch applauds Saudi plan to tackle growing budget deficit
Saudi money, Saudi currency, Saudi economy, Saudi finance, GCC currencies

Saudi Arabia's 2016 budget is committed to significant reforms but the fall in oil prices means that the deficit/GDP ratio will again be in double-digits, according to Fitch Ratings.

The ratings agency said in a statement that the kingdom's 2016 budget outlines measures to rationalise expenditure, increase non-oil revenues, and improve the fiscal policy framework.

Petrol and utility price hikes have been announced, and subsidy reform will proceed gradually over the next five years, Fitch said.

It added that the authorities aim to slow the growth of recurring expenditure, especially wages, salaries and allowances while privatisations are also planned.

"Adopting a medium-term expenditure framework with a budget ceiling and creating a debt management office should strengthen management of the public finances," Fitch said.

The commitment to reform was shown on December 28 with major hikes in petrol prices while water prices for industrial, government and large corporate users more than doubled and electricity, and gas and diesel prices were raised.

Fitch added: "The direct cost of subsidies to the budget is less than 2 percent of GDP, but indirect subsidies are large. Taxes on tobacco and soft drinks will be raised, and support for a GCC-wide value-added tax appears firmer."

The agency said the full impact on the deficit will depend on the pace and extent of implementation and the size of offsetting measures to allay the effect on low- and middle-income families.

The magnitude of the oil price decline means that the 2016 budget forecasts total revenues of SR513.8bn, with a projected deficit of SR326.2bn ($86.9bn), around 13.5 percent of GDP.

This would be a second successive double-digit budget deficit, after the Ministry of Finance said that the 2015 deficit was expected to reach SR367bn, or 15 percent of GDP - the largest ever Saudi deficit, albeit below Fitch's forecast of 16.8 percent. 

The 2016 budget for the first time includes an unallocated contingency reserve worth 22 percent of budgeted spending to cover unforeseen expenditure.

"We assume that, without a significant rebound in oil prices, this will not be fully drawn down, making a further reduction in the gap between budgeted and actual spending plausible. It is unclear whether heightened tension with Iran will increase security costs," said Fitch.

Concrete deficit financing plans were not in the budget, but Fitch said it assumes these will remain a combination of drawing down government assets held at the central bank and debt issuance, potentially including international issuance.

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