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Higher oil prices and well-planned spending will narrow the deficit in Saudi Arabia’s budget this year, according to a research note published by Merrill Lynch.
In 2017, the shortfall should shrink to 12 percent of GDP, instead of the 16.9 percent deficit the country faced last year, Bank of America’s investment wing predicted.
Non-oil sector growth coupled with improved liquidity will improve the budget “given the gradual pace of fiscal tightening,” the note said. The current budget predicts a $55-dollar barrel, but reaches a fiscal breakeven at a $98 barrel.
As a petrostate, the KSA has faced severe budget struggles since oil prices collapsed in 2014. Markets have been recovering since last November, when the Organization of Petroleum Exporting Countries (OPEC) agreed to limit the bloc’s output to reverse the global supply glut.
General consensus amongst oil experts says prices will stabilize at approximately $60 a barrel - roughly half of the $120 barrel highs seen before the market crash in 2014. New oil supply from American shale oil producers as well as reduced global demand has pulled prices down in a lasting way.
The Saudi Arabian monarchy has published a “Vision 2030” plan for the country that revolves around diversifying the economy away from oil exports. One part of the plan involves the initial public offering of five percent of Saudi Aramco in 2018 to raise funds for the economic overhaul. Several financial centers, including New York, London and Tokyo, are competing to host the IPO – the largest in modern financial history.
Unrest regarding the austerity measures in place to reign in the budget has the monarchy concerned for its stability. In January, Riyadh suspended the implementation of austerity measures in the first half of 2017 to ease financial burdens on a populace accustomed to heavy food and fuel subsidies.
By Zainab Calcuttawala for Oilprice.com
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Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on…