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Sat 4 Feb 2017 01:16 AM

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Saudi budget deficit set to narrow on higher oil prices in 2017

Credit specialist Fisch says there is reason for optimism among investors in Gulf kingdom despite energy sector challenges

Saudi budget deficit set to narrow on higher oil prices in 2017

Saudi Arabia's budget deficit is forecast to narrow this year as a result of higher oil prices and further economic diversification leading to higher non-oil revenues, according to a new report.

Credit specialist Fisch Asset Management said that despite challenges in the energy sector there is reason for optimism among investors in Saudi Arabia.

It said in a research note that improving oil revenues resulting from higher prices (average $57 per barrel in 2017) could account for up to a 25 percent medium-term fiscal adjustment for the Gulf kingdom.

"Despite efforts for diversification, oil revenues remain critical for Saudi Arabia’s short to medium term growth. A normalisation of Aramco’s contributions to the budget in part explain the predicted increase in oil revenues for 2017," it said.

The deficit shrank to SR297 billion ($79 billion) in 2016, well below a record SR367 billion gap in 2015, and below the government's projection in its original 2016 budget plan of a deficit of SR326 billion. The government is targeting to post a “balanced” budget by 2020.

Fisch said that while speakers at Abu Dhabi’s World Future Energy Summit last week emphasised the importance of the Gulf kingdom’s economic transformation for fast-tracking investment in renewables, it is clear that improving oil prices will be a "key driver for short to medium term growth".

Philipp Good, CEO at Fisch Asset Management, said: “With the likelihood that oil price improvements will drive a shrinking of the budget deficit by as much as 12 percent of GDP, we think it is very likely that Saudi Arabia will issue a sukuk in the first quarter of 2017.

“Oil prices and revenues remain a huge contributor to the Saudi economy so it’s encouraging that they have stabilised from previous lows. A balanced budget in the kingdom by 2020 is a big challenge but investors, who have seen government initiatives to boost short term growth and introduce medium term fiscal reforms, appear confident.”

Good added: “Looking at the rest of the GCC, we believe there is a good chance of some sizeable debt issuances in 2017. There are likely to be at least a handful of multi-billion dollar bond or sukuk issuances by Kuwait, Saudi Arabia, Oman and Bahrain, with potential for some opportunistic issuances by Abu Dhabi and Qatar, depending on pricing.

"We also expect a range of banks to issue debt in the region of $500-750 million, with a handful of corporates possibly doing the same.”