In December the government of Saudi Arabia will publish its 2016 budget. This fiscal budget will outline the spending priorities for the coming 12 months. It will be an indication of how Saudi Arabia will deal with the fiscal deficits (projected at 21.6% and 19.4% of GDP in 2015 and 2016) and what it might do to bring them under control. The Saudi government has already floated the idea of cutting fuel subsidies and hiring fewer people in the public sector, the most important sector for Saudi nationals.

Impact on country risk

The oil sector is an important source of revenue for Saudi Arabia’s public finances as it represents 87% of government revenue. Due to high oil prices in the past, government spending has increased substantially from a break-even oil price of USD 69 a barrel in 2010 to USD 106 a barrel in 2014. With the drop in oil prices, a high fiscal deficit appeared in 2015 which is not expected to improve significantly in the medium term. As the fiscal deficits are likely to erode the government’s financial assets in less than five years, the Saudi government will need to consolidate. However, it is reluctant to cut expenditure. Since the Arab revolts in 2011, the government has eased protests through economic hand-outs. Cutting fuel subsidies and reducing employment opportunities in the public sector could increase popular unrest. In view of a slowdown in the economy (linked to energy revenues through government spending), an expected current account deficit in 2015 which is not likely to improve in the medium term and oil prices being likely to remain low in the medium term, Credendo Group has downgraded the MLT political risk classification from 2 to 3. Analyst: Jolyn Debuysscher, j.debuysscher@credendogroup.com