Saudi fiscal buffers allow time for economic reform: Moody’s

Large reserves and low debt will give Saudi Arabia time to implement fiscal reforms, as oil revenue remains stagnant, Moody’s Investors Service said in a report.

Saudi Arabia has countered the loss of oil revenue by tapping into its financial reserves, slashing subsidies and reducing spending. But, barring a sustained oil recovery, its credit profile may come under pressure.

“Although capital projects are often the least politically sensitive expenditures for a government to cut, they have a more significant negative impact on real growth. Consequently, Saudi Arabia’s 2016 budget cuts are not likely to be sustainable over the medium term,” the report said.

Moody’s says that fiscal surpluses built during the 10 years before the oil decline allowed the kingdom to pay down debt and will provide enough buffers to defend its peg to the U.S. dollar.

The kingdom’s fiscal deficits, however, are expected to reach 12 to 15 percent of GDP over the next two years, after averaging a 10 percent surplus in the two years prior to the oil slump. The current account deficit is expected to reach 8 to 12 percent, compared to a 20 percent average surplus in 2012 and 2013.

Moody’s expects a real GDP of 1.5 percent this year, down from 3.4 percent in 2015 as government spending is cut, but oil output remains high in an effort to maintain market share.

The kingdoms 2016 budget allocated 25 percent of its spending for military and security, much of which is going to proxy wars with Iran. This, and other recent policies, has the potential to undermine the kingdom’s fiscal profile going forward.

“The extent to which the kingdom decides to keep these policies up and at what cost to its fiscal and macroeconomic profile will be an important credit consideration,” Moody’s said.

Write to Matthew Watson at matthew.w@argaamplus.com