Experts respond to plans to shrink a record state budget deficit with spending cuts and economic reforms
Analysts have responded positively to Saudi Arabia's plans to shrink a record state budget deficit with spending cuts, reforms to energy subsidies and a drive to raise revenues from taxes and privatisation.
The Gulf kingdom, its finances hit by low oil prices, on Monday revealed the 2016 budget which marked the biggest shake-up to economic policy in the world's top crude exporter for over a decade.
The plan suggests the kingdom is not counting on a major recovery of oil prices any time soon but is instead preparing for a multi-year period of cheap oil. The International Monetary Fund warned in October that Riyadh would run out of money within five years if it did not tighten its belt.
Analysts said they saw positives in the budget announcement; the 2015 deficit of 367 billion riyals ($97.9 billion) was lower than the 400-450 billion riyals which many investors had feared, and the planned cut in 2016 spending was smaller.
Below, analysts give their views on the budget and the future of the Saudi economy.
Mohammed Al-Shammasi, head of Asset Management at Derayah Financial in Riyadh
The budget deficit was a positive surprise because expectations were that it would come in between 400 and 450 billion riyals, and markets had largely factored in a deficit before the announcement.
There will be no recession, but a definite slowdown as the Saudi economy shifts gears in light of low oil prices.
What will overshadow the deficit announcement in my view is the government raising prices of gasoline, water and electricity. Sectors that will be negatively impacted include petrochemicals, transport and cement sectors, which are heavily subsidised by the government.
Sectors that will be positively impacted include utilities and natural gas providers - but the impact on their bottom lines will include the extent to which the government in turn cuts back subsidies for those companies.
Disposable income will also be eroded as consumers are burdened with higher fuel, water and electricity costs ... This might impact discretionary spending, which has already been weakened.
James Reeve, deputy chief economist at Saudi Arabia's Samba Financial Group
The implication of their revenue assumption for 2016 is that oil prices are going to be around $40. That's realistic - quite conservative, actually. That's a good thing.
They're projecting a decline in spending of about 14 percent, which is about the same as they said they had in 2015. If they do in fact cut by that much, you're looking at a recession.
The authorities appear determined to cut fat and contract spending. I think this will mean a recession in the non-oil economy. But I also think everyone recognises that in this oil price environment, they can't go on as they were.
John Sfakianakis, regional director of Ashmore Group in Riyadh
This is a good path to fiscal reform - I see it as very positive.
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.
The market had been expecting 2016 spending of 700-750 billion riyals, but the plan is above 800 - that is good.
Monica Malik, chief economist at Abu Dhabi Commercial Bank
We believe that the actual fall in expenditure will be sharper than implied in the budget.
We believe that the overall revenue assumption in the 2016 budget also implies a gradual pace of fiscal reforms. A faster pace of reforms would have boosted non-oil revenues. Nevertheless, we see 2016 as the likely start of a multi-year fiscal adjustment programme.
We see real GDP growth decelerating sharply in 2016, albeit remaining positive. Non-oil GDP growth is forecast to moderate with the lower government spending feeding into the wider economy. Furthermore, real oil GDP growth is expected to slow with a limited marginal increase in output in 2016.
Sergey Dergachev, senior portfolio manager for Emerging Market Debt at Union Investment Privatfonds in Germany
In my view, those statements are very realistic as there is a very high probability we will see relatively low oil prices in 2016.
On the removal of subsidies, in my view it will be a very gradual and cautious approach by the Saudi government, since subsidies in Saudi Arabia ... are significant from a social policy point of view, and taking quick and bold steps there can lead to social tensions.
Since Saudi Arabia has ample reserves, it has a huge advantage that it can relatively smoothly start gradually revising subsidies, very incrementally.
Santhosh Balakrishnan, research analyst at Riyad Capital
The government is more realistic - the budget is assuming $40 per barrel oil, a completely different scenario to past budgets.
In a nutshell it is cutting down on expenditure, which was largely expected.
Overall, when looking at the headline figures, I'm comfortable with the numbers, and they came in below consensus estimates.
It's negative for the construction and cement sector - they will be burdened by capacity.
Anirban Kundu, head of Investment Advisory Services at Saudi Fransi Capital
The lower spending number for 2015 is good news, showing that the government is rightly concerned about slippage. If the same prudence is executed during 2016, it should help in keeping deficits under control.
The projected revenues look reasonable, estimating an average price of crude around $40 a barrel with the same percentage of non-oil revenues. If non-oil revenues are higher, the government could do lower prices as well.
Overall at this time the markets should react positively, but I think the trend will be clearer once more details are brought to light.