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Wed 19 Dec 2018 03:17 PM

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Saudi budget's 2019 oil price estimate seen as 'wishful thinking'

Some analysts say Saudi Arabia's 2019 revenue forecast is surprising because they estimate it to be based on a relatively high price of oil

Saudi budget's 2019 oil price estimate seen as 'wishful thinking'
The government’s projections may be based on a crude price as high as $80 a barrel in 2019.

Some analysts say Saudi Arabia’s 2019 revenue forecast is surprising because they estimate it to be based on a relatively high price of oil.

The plan defies “the laws of arithmetic,” said Ziad Daoud, the Dubai-based chief Middle East economist at Bloomberg Economics.

The government’s projections may be based on a crude price as high as $80 a barrel in 2019, and it would have to climb to $95 a barrel to balance the budget, he said. Brent crude traded near $56 a barrel on Wednesday.

The immediate reaction from stock investors was lacklustre, with the main Saudi gauge falling as much as 0.8 percent in the first 10 minutes of trading.

That follows a muted response from bond investors on Tuesday: Saudi Arabia’s $5 billion of bonds due 2028 closed little changed.

Jason Tuvey, the London-based senior emerging market economist at Capital Economics, in a report titled Saudi budget: wishful thinking, said: “Saudi Arabia’s budget for 2019 outlined further fiscal loosening, but the government seems to be relying on optimistic assumptions for oil prices to rise to almost $80 per barrel.

“Deciphering the Saudi budget is never an easy task but, reading between the lines, it seems to point to a third consecutive year of fiscal loosening.”

Mohamed Abu Basha, the head of macro analysis at Cairo-based EFG-Hermes investment bank, said: “Like-for-like spending is set to contract by 2.2 percent year-over-year in 2019. Hence, the fiscal stance is largely neutral, which, in our view, comes as no surprise, given the sharp correction in oil prices”

As the kingdom plans a 20 percent increase in capital spending, he said he foresees “challenges” of realizing “such ambitious investment spending”.

Delphine Arrighi, a London-based emerging-market fund manager at Merian Global Investors, said fiscal slippage is very likely with the risk of more debt issuance next year, because the government’s estimates for oil prices look "very optimistic”.