Moderation in the Saudi business cycle is the most likely outcome over a five-year forecast horizon with real GDP expected to average below 3% per annum, the National Commercial Bank (NCB) said on its "Saudi Arabia's 2016 Budget Report" issued Tuesday a day after the announcement of the new Saudi budget. As for 2016, the NCB report projected a real GDP growth of 2.3%, the slowest pace since 2009. The oil sector will be a drag especially with no expected increase in crude production that will stabilize around 10.2 mmbd. The non-oil sector, which is estimated to moderate around 3.5%, will not be able to offset the lack of growth in the oil sector. Even though the government has been adamant in enhancing the absorptive capacity of the economy and aiming towards diversifying away from hydrocarbons, the oil story remains pivotal and valid, with crude still representing around 80% of fiscal and export revenues. Oil markets are expected to remain in a lower range around $40-80/bbl during 2016-2020, with a bias to the downside, especially that oil lacks strong upside momentum with markets oversupplied. Lower compliance among OPEC members and higher supplies from Iran and Iraq are expected to surpass demand growth emanating from China that will not be able to generate the 40-50% of total incremental oil demand of previous years. However, fiscal reforms and streamlining subsidies will ensure the resilience of government finances by propping up the non-oil revenues, NCB report said. The report noted that 2016 will continue to be a challenging time for policy making. The broader international economic environment will remain volatile next year with countries, mostly emerging markets, adjusting to the normalization of US monetary policy by the Federal Reserve. Asset classes across the board including commodities will be pressured, especially that a stronger dollar will reduce the appeal of commodities as alternative investments. The interest rate environment will adjust upwards, resulting in a tighter and more costly external borrowing. On an medium to long-term note, the government will adopt a 5-year privatization plan that will involve a range of sectors and economic activities, which will ensure efficiency and raise non oil revenues. The government had underscored also its full commitment to applying the GCC-wide value added tax. Institutionally, the government had established a debt management unit under the MoF to diversify its debt issuances locally and internationally. "2016 budget, in our opinion, is the start of a new era of fiscal consolidation and reforms that will ensure a sustainable and viable economy," NCB said in the report. Oil prices will continue to be the main drag on Saudi's balances, the report pointed out. Although the budget press release does not provide oil price and production level assumptions, "we believe that both revenues and expenditures are underestimated," NCB said in the report. Based on announced revenues, government assumed next year's oil prices to average $35/ bbl. "With our forecast of $50/bbl for the Arabian light spot price average and a 10.2 mmbd for oil production average in 2016, we project revenues and expenditures at SR629.0 billion and SR897.0 billion, respectively. This would lead to a budget deficit of SR268.0 billion, or 10.4% of estimated GDP in 2016." The oversupply will remain a hanging cloud on oil markets containing any upside momentum next year. This will entail a reduction in oil revenues by 3.5% to SR429 billion despite the elevated levels of production, the report further noted. Aggregate-wise, the Kingdom's total revenues are forecasted to increase by 3.5% to reach SAR629 billion, supported by SR 200 billion worth of non-oil revenues after the gradual removal of subsidies. Actual expenditures will likely exceed budgeted expenditures by 6.8% to reach SR897 billion, yet almost half the budget overrun posted in 2015. NCB moreover said easing subsidies will underpin inflation that will increase to 2.7% in 2016 despite a stronger USD and weak commodity prices. A strengthening greenback, evident from a trade-weighted dollar that appreciated by 9.6% YTD, has been favorably containing imported inflation, which is critical given the heavy local reliance on imports. We do believe, however, that the ripple effects of raising energy and utility prices on industry and higher income consumers will feed into higher prices across the economy, thus, offsetting the positive international dynamics, NCB said in the report.
