Dubai: In order to bridge its fiscal deficit Saudi Arabia is expected to use a combination of revenues from assets held overseas, official reserves and market borrowings.
This year, the Kingdom tapped into its sizeable reserves. Reserves dropped to under $670 billion (Dh2.4 trillion) in July 2015 from $746 billion in August 2014. The Saudi government also resumed long-term debt issuances for the first time since 2007, with total issuances 95 billion riyals (Dh93 billion) so far. According to recent press reports, the government is planning issuance of local currency bonds worth 20 billion riyals.
The new issues will bring to 115 billion riyals the amount of bonds issued by the government to local banks this year. It resumed issuing bonds to banks in July for the first time since 2007 to cover a budget deficit created by low oil prices.
Despite the rapid drawdown over the first half of 2015, SAMA’s forex reserves still stood at about 100 per cent of GDP in June, and government deposits at SAMA represented $294 billion or 42 per cent of GDP.
In addition, about $340 billion in foreign assets were held by entities other than SAMA at the end of 2014, of which portfolio assets and currency and deposits represented $200 billion and $88 billion respectively.
Based on the resource availability at the government’s disposal, analysts say a realistic mix of debt financing and spending cuts will be the way forward.
“We believe that the government will finance the deficit with a mix of higher domestic borrowing, utilisation of deposits in the banking sector and drawdown of FX reserves. However, with signs that banking sector liquidity is tightening, Saudi Arabia has indicated that it will look to tap the international bond market in 2016,” said Monica Malik, Chief Economist, Abu Dhabi Commercial Bank.
Preliminary data indicates that government debt remains low, at 5.8 per cent of GDP in 2015, albeit it is rising. “The drawdown of FX reserves should moderate in 2016 with the narrowing deficit. Meanwhile, 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,” said Malik.
