Saudi deficit set to narrow as oil prices rise

Muscat: Saudi Arabia’s budget deficit is set to narrow in 2017, as a result of higher oil prices and diversification measures increasing non-oil revenues, according to Fisch Asset Management.
Recent forecasts have projected a Saudi budget deficit of $85 billion in 2017, compared to $107.5 billion in 2016, with oil prices rising to $57 per barrel. On that basis, improving oil revenues resulting from higher prices could account for up to a 25 per cent medium-term fiscal adjustment.
Despite efforts for diversification, oil revenues remain critical for Saudi Arabia’s short to medium term growth. A normalisation of Saudi Aramco’s contributions to the budget in part explains the predicted increase in oil revenues for 2017. Meanwhile, from 16-19 January, the World Future Energy Summit in Abu Dhabi hosted a dedicated Saudi Arabia Pavilion, in view of the Kingdom’s Vision 2030 aims to guarantee the competitiveness of renewable energy.
Assessing the proposed initial public offering (IPO) of 5 per cent of Saudi Aramco, the latest credit report by Independent Credit Review (I-CV), a subsidiary of Fisch, expects a maximum leverage of 2.5 multiples, qualifying it for a rating in line with the sovereign. The company has said that it has the largest proven oil reserves in the world, with I-CV suggesting a reserve life of 70 years and yearly production of 3.7 billion barrels of oil equivalent (BOE).
Speakers at Abu Dhabi’s World Future Energy Summit emphasised the importance of the Kingdom’s economic transformation for fast-tracking investment in renewables, it is clear that improving oil prices will be a key driver for short to medium term growth.
“As a state-owned company operating in the Kingdom’s most important sector, we expect Saudi Aramco to leverage up to a maximum of 2.5x when it is listed. We also think Aramco could qualify for a credit rating of A-, in line with the sovereign rating. Moreover, with the likelihood that oil price improvements will drive a shrinking of the budget deficit by as much as 12 per cent of GDP, we think it is very likely that Saudi Arabia will issue a Sukuk in the first quarter of 2017,” said Philipp Good, CEO at Fisch Asset Management.
“Oil prices and revenues remain a huge contributor to the Saudi economy so it’s encouraging that they have stabilized from previous lows. A balanced budget in the Kingdom by 2020 is a big challenge but investors, who have seen government initiatives to boost short term growth and introduce medium term fiscal reforms, appear confident. We look forward to seeing how this develops.”