Saudi Seeks Advice On Cutting Billions From Its 2016 Budget #saudiarabia #commoditytrends

By 25th August 2015 Industry News No Comments

Saudi Arabia is showing more signs that it is committed to a “lower-for-longer” oil price scenario, with Bloomberg reporting Tuesday that the Royal Kingdom is seeking counsel on how to reduce billions of dollars from its 2016 budget due to the fall in oil prices.

Seeking Advice

Sources told Bloomberg that the Saudi government is collaborating with advisers on an evaluation of capital spending plans and may postpone or scale back some infrastructure projects to save money.

The sources said the government is in the early stages of the evaluation and could consider reducing investment spending, which is estimated to be roughly $102 billion this year, by approximately 10% more.

Current spending on areas such as public sector salaries would not be impacted by the cuts, the sources also said.

Saudi Economic Growth Set To Slow, IMF Says

The International Monetary Fund (IMF) said last week that Saudi Arabia’s economic growth will slow this year and next as the government is forced to cut spending to address falling oil prices.

In an emailed statement to Bloomberg following its regular country consultation, the IMF said the Royal Kingdom’s GDP will grow by 2.8% in 2015 and 2.4% next year. This contrasts to 3.5% growth in 2014. In the “medium term,” the IMF said, growth may expand to 3%.

For the first time since 2007, Saudi turned to the bond market earlier this year following the collapse of oil prices by over 50%. The consequent budget deficit, which the IMF forecasts at 19.5% of GDP, may prompt Saudi’s leaders to forego its aggressive spending plans.

What The IMF Says Saudi Should Do

Saudi Arabia requires “comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment,” the IMF said in the email to Bloomberg. “The sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade.”

It added that the government should also enact value-added and land taxes.

In August, Saudi Arabia sold $5.3 billion of bonds to public institutions and local banks to cover the deficit. At the end of last year, government debt was equal to 1.6% of the country’s GDP, the IMF added.

The fall in oil revenues joined with the war in Yemen and an increase in domestic spending led Saudi’s net foreign assets to decline for a fifth straight month in June. These reserves were at $664.4 billion in June, down from $724.5 billion at the beginning of 2015.

In June, Saudi Arabia opened its stock market to global investors as part of a plan diversify the economy away from oil. Since that time, the benchmark stock index has dropped by 13%, Bloomberg reports.