Dubai: In the absence of further increase in oil prices and or drastic cut in government expenditures, analysts expect Saudi Arabia’s budget gap to be wider than the original estimates and will have to resort to multiple funding options to cover the fiscal deficit in 2017 and beyond.
Saudi Arabia has forecast a substantially lower deficit of SAR 198 billion ($53 billion) in 2017, about 7.7 per cent of 2017 GDP estimates.
“We forecast that Saudi Arabia’s fiscal deficit will narrow to about SAR262 billion, equivalent to 10.9 per cent of GDP, in 2017 (from 16.8 per cent in 2016). The lower deficit will largely be due to the higher oil price and weaker spending,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB).
The standby measures to fund the budget deficit could include further drawdown of FX reserves, debt issuance and utilisation of government deposits in the banking sector.
Saudi Arabia’s foreign exchange (FX) reserve position saw another significant fall in 2016, but it remained comfortable on a historical basis. Net foreign assets (NFA) held by SAMA [Saudi Arabian Monetary Agency] fell from a peak of $737.1 billion in August 2014 to $535.9 billion in October 2016, their lowest level since December 2011.
The monthly NFA drawdown averaged $7.3 billion in the first 10 months of 2016, down from $9.6 billion in 2015. The monthly drawdowns were particularly strong in the first quarter of 2016 when oil prices were low. The sharp fall in the October level implies a marked pickup in government spending in the fourth quarter of 2016, especially considering the international bond issuance that month.
“We expect the pace of average monthly reserve drawdown to moderate in 2017 to around $5 billion with the narrowing in the fiscal deficit and greater debt issuance. We estimate that SAMA’s NFAs will stand at around 73 per cent of GDP at the end of 2017. This compares to just 17 per cent of GDP in 1981, right before oil prices collapsed and Saudi Arabia entered a multi-year retrenchment cycle,” said Malik.
Saudi Arabia’s government debt rose sharply in 2016, although remaining low by international standards. Preliminary budget data indicates that government debt rose to SAR316.5 billion in 2016, equivalent to 13.2 per cent of GDP.
The Saudi Arabian government started borrowing internationally for the first time in 2016. The issuance of international debt would be a seminal departure for Saudi Arabia, which has thus far only issued domestic sovereign debt. Saudi Arabia raised a $10 billion syndicated loan in May 2016 and $17.5 billion through a sovereign bond issued in October 2016.
Saudi Arabia’s sovereign bond was particularly vital in improving liquidity in the banking system, with domestic funding sources stretched. Meanwhile, domestic debt in 2016 stood at SAR213.4 billion ($56.9 billion).
“We expect the government to raise external debt again in 2017 to help reduce the pressure on domestic funding sources and help ease banking sector liquidity conditions,” said Shailesh Jha, an Economist at ADCB.
Analysts expect foreign demand for Saudi Arabia’s debt will be supported by the SAR’s peg to the dollar, supported in part by the dollar strength. It will also provide a benchmark for foreign corporate issuances, which as yet remain limited.
The government has indicated that the debt ceiling will be set at 30 per cent of GDP by 2020 and is looking to use a variety of debt instruments, including sukuk issues. Official statements indicate that Saudi Arabia could return to the debt market in towards the close of the first quarter of 2017.
The Saudi government is expected to continue utilising its deposits in the commercial banking system, although much will depend on domestic liquidity conditions. Government deposits in the banking system were down by about 18 per cent in October 2016, but is still standing at 41 per cent of 2016 GDP.