x Abu Dhabi, UAESaturday 20 January 2018

Danger of debt woes in Saudi

A report from Jadwa Investment warns Saudi Arabia needs tough policy reforms to avoid running a deficit from 2014.

Tough policy reforms are needed in Saudi Arabia if the kingdom is to avoid running a budget deficit from 2014, a report has warned.

High government spending, a lack of increases in oil output and rising domestic crude consumption are setting the country on a path to escalating debt, said the report by Jadwa Investment, a Saudi financial services company.

"Preventing this outcome requires tough policy reforms in areas such as domestic pricing of energy and taxation, an aggressive commitment to alternative energy sources, especially solar and nuclear power, and increasing the kingdom's share of global oil production," Brad Bourland, the chief economist, and Paul Gamble, the head of research, wrote in the report by the Saudi investment company.

In response to pockets of unrest in the kingdom and instability across the Middle East this year, King Abdullah unveiled expenditure increases totalling US$129 billion (Dh473.8bn), targeting cash handouts and social infrastructure improvements. The emergency spending increase reversed an earlier commitment to curtail stimulus measures rolled out during the global financial crisis.

Current oil prices averaging about US$104 per barrel mean the government is comfortably able to finance the extra spending. The budget is calculated on an oil price that is about $20 below the current price, Jadwa said. But it warned of the danger posed by three economic trends.

First, government spending was likely to continue rising at an annual rate of 7 per cent or more, with oil cash the main source of revenue.

Second, domestic oil consumption was rising sharply, reducing the amount of oil available for export. Domestic oil prices of between 3 and 20 per cent of global rates meant the efficiency of oil use was declining, it said.

Third, there was unlikely to be a sustained increase in oil output over the next decade or so, given that there had been no significant increase in 30 years.

Without oil price rises, Saudi Arabia's net foreign assets would drop to $100bn in 2024, after which new debt would have to be used to finance the deficit.