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Saudis cut huge budget deficit, to loosen purse strings in 2017

RIYADH/DUBAI (Reuters) - Saudi Arabia said on Thursday it had succeeded in cutting a huge state budget deficit caused by low oil prices and would increase government spending in 2017 to support flagging economic growth.

The announcement appeared likely to reassure global investors worried about the kingdom’s ability to cope with shrunken oil revenues. The riyal came under speculative pressure this year but currency jitters have eased in recent months.

“The public finances haven’t improved on this scale since the early 1990s, following the end of the Gulf War,” said Jason Tuvey, Middle East economist at London-based Capital Economics.

Nevertheless, analysts said Saudi Arabia’s outlook remained uncertain. Some parts of the 2017 budget plan - including a big jump in oil income projected next year - were not fully explained, and the economy is likely to face more pain in coming years as Riyadh struggles to eliminate the deficit entirely.

The deficit shrank to 297 billion riyals ($79 billion) in 2016 from last year’s record gap of 367 billion, which was a mammoth 15 percent of gross domestic product. The original 2016 budget plan had projected a deficit of 326 billion riyals.

Riyadh slashed spending on infrastructure and perks for civil servants to get its finances under control. For the first time in years, it kept its spending below its original budget projection in 2016; actual spending was 825 billion riyals compared with a projection of 840 billion.

Revenues were slightly higher than expected at 528 billion riyals instead of 514 billion as the government raised cash with steps such as higher municipal and visa fees.

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These austerity measures sapped consumers’ income and deterred private companies from investing - even though their investment is vital to diversify the Saudi economy beyond oil in the long term.

Economic growth slowed to 1.4 percent in 2016, far below the average of 4 percent in the past decade, the government said.


The 2017 budget plan may help growth pick up. Riyadh plans to increase spending to 890 billion riyals from the 840 billion originally projected for 2016; spending on infrastructure is to rise 69 percent.

Domestic fuel and electricity prices will rise by unspecified margins later this year as the government reduces its subsidy burden, but to protect the petrochemical industry, gas feedstock prices will not increase before 2019.

To offset the impact of austerity on poorer citizens, the government will introduce a system of cash payments to them.

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At the same time, the government projected higher oil prices and non-oil revenues would help it shrink the deficit further next year to 198 billion riyals or 7.7 percent of GDP.

Some doubts continue to overhang Saudi finances, however. The budget projected oil revenues would soar 46 percent to 480 billion riyals next year, even though Saudi Arabia has pledged to cut its output under a deal with OPEC and Brent oil, at $55 a barrel, is only 25 percent above its average price in 2016.

Energy Minister Khalid al-Falih said Riyadh had based its budget on a “conservative” scenario for oil prices, but did not reveal a specific price. Higher domestic energy prices will help bolster oil revenues, other officials said.

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Several economists estimated the budget assumed an average oil price within a range of about $47 to $55 a barrel.

Another uncertainty is the effect on the economy of Riyadh’s drive to reduce the deficit to zero by 2020. A 5 percent value-added tax is to be introduced in 2018, which could hit consumer spending significantly.

“It is feasible that the combination of expenditure reduction, new taxes, cutting of waste, privatization plans etc. could allow Saudi to eliminate the budget deficit by 2020,” said Nasser Saidi, president of consultancy Nasser Saidi and Associates in Dubai.

“However, this would require fiscal adjustment by some 2 or 3 percent (of GDP) per annum, which risks inducing a recession.”

Additional reporting by Hadeel Al Sayegh, Noah Browning, Tom Arnold and Alexander Cornwell in Dubai; Editing by Richard Balmforth