Saudi authorities are already planning spending cuts as the world’s biggest oil exporter seeks to shore up its public finances
Saudi Arabia may run out of financial assets needed to support spending within five years amid the drop in oil prices if the government maintains current policies, the International Monetary Fund said, underscoring the need of measures to cut the nation’s budget deficit.
The same is true of Bahrain and Oman in the six-member Gulf Cooperation Council, the IMF said in a report on Wednesday. Kuwait, Qatar and the United Arab Emirates have relatively more financial assets that could support them for more than 20 years, the Washington-based lender said.
Saudi authorities are already planning spending cuts as the world’s biggest oil exporter seeks to shore up its public finances. Officials have repeatedly said that the kingdom’s economy, the Arab world’s biggest, is strong enough to weather the plunge in crude prices.
But the IMF said measures being considered by oil exporters “are likely to be inadequate to achieve the needed medium-term fiscal consolidation,” the IMF said. “Under current policies, countries would run out of buffers in less than five years because of large fiscal deficits.”
The decline in the price of crude, which accounts for about 80 per cent of Saudi’s revenue, is prompting the government to delay projects and sell bonds for the first time since 2007. Even so, net foreign assets fell to the lowest level in more than two years in August, with the kingdom avoiding economic policies that could trigger social or political unrest.
The IMF expects Saudi’s budget deficit to rise to more than 20 per cent of gross domestic product this year and 19.4 per cent in 2016.
“Countries with fiscal buffers are right to use them to smooth their policy adjustment to support growth, but still need to pursue fiscal consolidation over the medium term because oil prices are expected to remain low,” the IMF said. “There is no room for complacency even if fiscal buffers appear strong.”
Net foreign assets fell for a seventh month to $654.5 billion at the end of August. Saudi Arabia has raised 55 billion riyals ($14.7 billion) from debt issuance this year. While the country’s debt-to-GDP ratio was below 2 per cent in 2014 — indicating capacity for more borrowing — the IMF expects it to grow to 17 per cent next year.
The world’s largest oil exporter has led the Organization of Petroleum Exporting Countries in boosting production to defend market share even as prices plunged below $50 a barrel, abandoning its previous role of cutting output to boost prices.
Analysts have said Oman and Bahrain face greater risks than their wealthier neighbours from the decline in crude prices, with less oil to sell, thinner fiscal buffers and in Bahrain’s case, more debt.
The IMF expects Oman’s budget deficit to widen to 17.7 per cent of GDP this year and 20 per cent in 2016. For Bahrain, the fund expects the shortfall to stand at 14.2 per cent in 2015 and 13.9 per cent next year.
Bloomberg News