January 9, 2016

Why is 2016 Critical for Saudi Arabia?

Why is 2016 Critical for Saudi Arabia?
Abdullah Al Alami*
January 9, 2016

The year 2016 is critical for Saudi Arabia where further low oil and gas export prices are in the horizon.
Let’s look at certain economic data. In 2015, Saudi Arabia’s Current Account posted its first deficit since 1998 at –$43 billion. In 2016, Saudi Arabia will probably have its second consecutive fiscal deficit, amounting to SR326 billion, compared with SR145 billion in 2015. This accounts for 6.2 percent of GDP. Real GDP growth has decelerated slightly in 2015 and foreign reserves fell by about $12 billion, reaching $632 billion in late 2015.
What is expected in the future? The Government is obviously committed to support the economy by budgeting for a SR326 billion deficit, based on revenues of SR514 billion and expenditures of SR840 billion. Economists expect higher energy prices, as a result of the recent subsidy reform, leading to an increase in the cost of living. However, domestic energy price reform will probably have a positive impact on non-oil revenue and curb growth in energy consumption.
What about oil and development? While Brent averaged $52 per barrel in 2015, it is expected that it will hit $40 or lower per barrel despite rising geopolitical tensions in the region. Saudi crude production is expected to remain unchanged in 2016 at around 10.2 mbpd. Never-the-less, the Government reaffirmed its commitment to maintain a high level of spending despite the continued environment of lower oil prices.
The 2016 budget outlines a small reduction in the level of spending compared to 2015, down by SR20 billion to SR840 billion. However, Saudi Arabia is still committed to major efforts to provide jobs for Saudis, extend more housing opportunities, and improve education and medical services. Despite the global environment of lower oil prices, Saudi Arabia has maintained a high level of spending in the 2016 fiscal budget. Where is the money coming from? Total revenue is budgeted at SR514 billion, 73 percent of which will come from oil. In addition, Saudi Arabia has saved funds to help pay for cuts in export revenues. Meanwhile, Saudi Arabia will focus on privatization, energy subsidy, reform procedures, imposition of a value-added tax, and economic diversification.
What else is expected in the future? It is likely that the National Transformation Program (NTP) will provide a roadmap for major social and economic initiatives to be undertaken until 2020. (NTP) is expected to increase the efficiency of public sector spending, while the Government will most likely continue to support key infrastructure developments including transport, housing, power and water.
Further economic reforms are still needed to meet the challenging future, such as the actual implementation of the National Project Management Agency policies.
The most significant trend in 2016 is probably the announcement by Prince Muhammad Bin Salman on the possibility of sale of shares in the national oil firm, Saudi Aramco. Floating a minority share of Aramco is not such a bad idea. This by itself is a clear indication that the rules of the game are no longer the same.

*Saudi Economist

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