Saudi Arabia announces spending cuts, wide-ranging reforms

RIYADH/DUBAI — Saudi Arabia, its finances hit by low oil prices, announced plans to shrink a record state budget deficit with spending cuts, reforms to energy subsidies and a drive to raise revenues from taxes and privatisation.

The 2016 budget, released by the finance ministry on Monday, marked the biggest shake-up to economic policy in the world's top crude exporter for over a decade, and includes politically sensitive reforms from which authorities previously shied away.

The plan suggests the kingdom is not counting on a major recovery of oil prices any time soon but is instead preparing for a multi-year period of cheap oil. The International Monetary Fund (IMF) warned in October that Riyadh would run out of money within five years if it did not tighten its belt.

"Our economy has the potential to meet challenges," King Salman said in a speech, adding the 2016 budget launched a phase in which his kingdom would diversify its revenues.

The government ran a deficit of 367 billion riyals ($97.9 billion) or 15 per cent of the gross domestic product (GDP) in 2015, officials said. 

The 2015 deficit is the highest in the history of Saudi Arabia, which relies on oil for 90 per cent of public revenues, but was not as big as some expected.

The IMF had projected the 2015 deficit to be around $130 billion and other reports also put it above $100 billion.

The 2016 budget plan aims to cut that to 326 billion riyals ($87 billion), reducing pressure on Riyadh to pay its bills by liquidating assets held abroad and issuing bonds.

The 2016 budget projects revenues at 514 billion riyals ($137 billion), down from 608 billion riyals ($162 billion) in 2015, when oil revenues accounted for 73 per cent of the total.

Income for 2015 was 15 per cent lower than projections, the lowest since 2009 when oil prices dived as a result of the global financial crisis, and 42 per cent less than in 2014, after oil prices fell by more than 60 per cent since mid-2014 to below $40 a barrel.

The Brent oil price averaged about $54 a barrel this year but is now around $37.

The dive is largely due to Saudi Arabia's own policies and those of other states grouped in the Organisation of Petroleum Exporting Countries (OPEC), which are refusing to cut oil production as they seek to drive less-competitive players, including US shale producers, out of the market

Spending was envisaged at 840 billion riyals ($224 billion), slightly below 2015 projections of $229 billion, and down from 975 billion riyals actually spent this year.

The ministry said it would review government projects to make them more efficient and ensure they were necessary and affordable.

The success or failure of the budget plan will be key to maintaining the confidence of financial markets in Riyadh.

As the deficit has swelled, the riyal has dropped in the forwards market to its lowest since 1999 because of fears Riyadh may eventually have to abandon its peg to the US dollar.

Subsidies

In its budget statement, the ministry said it would adjust subsidies for water, electricity and petroleum products over five years. That is a politically sensitive step since the kingdom has traditionally kept domestic prices at some of the lowest levels in the world as a social welfare measure.

Changes will aim to make energy use more efficient and conserve natural resources, while minimising the negative effects on lower- and middle-income Saudis, the ministry added.

Authorities moved quickly after the budget figures were released, with the official SPA news agency reporting the increase of petrol prices and saying the government would also cut subsidies for electricity, water, diesel and kerosene.

Such subsidies are a highly sensitive issue in Saudi Arabia, where residents have grown accustomed to low utility and fuel costs.

The price of higher-grade unleaded petrol will rise to 0.90 riyals ($0.24) per litre from 0.60 riyals, a hike of 50 per cent, though it remained very low by global standards.

The price of lower-grade petrol will surge by 67 per cent to 0.75 riyals ($0.20) from 0.45 riyals per litre.

National oil conglomerate Aramco said on Twitter it was immediately closing petrol stations until midnight on Monday, when it will resume sales at new prices.

The ministry outlined other reforms including "privatising a range of sectors and economic activities", although it did not give details, and raising taxes on soft drinks and tobacco, without giving a timeline.

It is also considering plans to raise charges on public services and to apply value-added tax (VAT) in cooperation with other Gulf Arab nations, which are facing similar pressure from the oil price drop.

The United Arab Emirates has said it expects a regional VAT to take about three years to introduce.

The economic and fiscal reforms seek to make the budget more sustainable, including a programme to contain spending growth, especially for wages and benefits which accounted for half of the 2015 budget.

Private analysts said markets could react positively to Monday's budget announcement because the 2015 deficit was lower than the 400-450 billion riyals which many investors had feared.

"It seems the levers of fiscal discipline were put into action in the second half of this year, rather than waiting," said John Sfakianakis, regional director of asset manager Ashmore Group in Riyadh.

But GDP growth, which was 3.3 per cent this year, is expected to suffer as state spending cuts hurt the construction industry and higher fuel and electricity prices dampen consumer spending.

"We see real GDP growth decelerating sharply in 2016, albeit remaining positive," said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

The finance ministry did not disclose the average oil price assumed in its 2016 budget calculations but economists estimated it was about $40 a barrel. The figure is an accounting device and does not necessarily mean Riyadh expects oil at that level.

Figures given by Economy and Planning Minister Adel Fakieh indicated the cost of Saudi Arabia's military intervention in Yemen was not a major factor in the budget. 

He said Saudi Arabia had increased its military and security spending in 2015 by about 20 billion riyals because of the conflict.

A quarter of next year's spending, or $57 billion, has been allocated for defence and security expenditures, the ministry pointed out.       

Tapping reserves

The statement noted that the budget "comes amid challenging international and regional economic and financial conditions" including "very low oil prices".

Riyadh tapped into the huge fiscal reserves it accumulated when oil prices were high to maintain high spending this year and launch a military intervention against Iran-backed rebels in Yemen.

The IMF has warned Riyadh that failure to cut spending and implement reforms will eat up the country's fiscal reserves in just five years.

The kingdom withdrew more than $80 billion this year from the reserves, which stood at $732 billion at the end of 2014, and issued bonds worth around $20 billion.