Saudi Arabia Rejects IMF’s 2016 Deficit Forecast

By Khalil Hanware

Saudi Arabia’s robust foreign currency reserves as well as the low public debt (less than 6 percent of GDP) are two important fiscal cushions in the face of volatile oil prices, a top Saudi-based economic analyst said yesterday.

Fahad Alturki, senior economist at Jadwa Investment, made the comments as Finance Minister Ibrahim Al-Assaf asserted on Saturday that the International Monetary Fund’s forecasts that Saudi Arabia’s budget surpluses will gradually decline before dropping into deficit by 2016 are a “doomsday scenario.”

Saudi Arabia is ready to tap its foreign currency reserves, equivalent to more than 100 percent of the GDP, if energy prices fall, the minister said.

“We are ready for that, for these circumstances, through building the appropriate reserves in order to be ready for any adverse developments in the oil market,” he was quoted as saying in a Reuters report.

The minister was speaking to reporters after his talks with IMF Managing Director Christine Lagarde in Riyadh.

Commenting further on the Kingdom’s economic outlook, Alturki added: “This scenario is built under the assumption of rising domestic oil consumption that is not matched with higher level of production, rising government spending and falling oil prices. If you put all these factors together, you end up with a fiscal deficit, the only question is when.”

Jarmo T. Kotilaine, a regional economist, said: “There clearly are some troubling trends in the fiscal area as well as in domestic energy consumption, which in turn limits export earnings from oil. However, policies are not made in a vacuum. Much of the increased fiscal spending in recent years has been at least to a degree cyclical, initially in response to the global economic downturn.”

Other economists have also said that net foreign assets held by the Saudi Arabian Monetary Agency (SAMA) are easy enough to finance any likely deficits for many years. They pointed out that the government has very low debts, all domestically held.

An IMF report last month said Saudi Arabia, which has been running big budget surpluses, is expected to see those surpluses shrink gradually in coming years and could post a small deficit as early as 2016.

“The projected decline trend in oil prices over the medium term will reduce the surpluses, with the fiscal balance expected to turn into a small deficit by 2017,” the IMF said in the report completed in June and published in September.

It said the euro zone’s debt crisis could lead to a weaker global demand and lower oil prices, though it acknowledged that its forecasts involved great uncertainty.

In his analysis, Kotilaine said: “Any fundamental changes in the oil markets will naturally over time trigger a policy rethink and thereby likely create a less alarming scenario. Transitional costs can be dealt with through the substantial reserves the Kingdom has accumulated.”

Clearly the main structural risk with the current fiscal model is its heavy reliance on high and growing oil prices, he added. “Generally speaking, the basic fundamentals of the oil market, even if we allow for possibly sharp short-term cycles, suggest that this scenario will materialize. Innovation and higher costs have the potential to change these dynamics with time but I believe that the rise of the unconventional oil story (especially in North America) has reduced — not increased — the probability of a near-term move away from hydrocarbons. And the importance of unconventional oil itself is an argument for high prices as the extractions costs are higher,” Kotilaine said.

The IMF country report said Saudi Arabia’s economic prospects are strong. Growth is expected to remain high — led by the private sector — with large fiscal and external surpluses due to increased prices and production of oil. The oil market remains the main source of risk, with the economy showing little direct impact from the euro area crisis and few signs of overheating.

Saudi Arabia has provided important support to the global economy during a period of high uncertainty, including through its actions in stabilizing the global oil market. Global risks — both from the ongoing euro area crisis and broader geopolitical tensions — have created substantial uncertainty with respect to the global growth outlook.

Reflecting its systemic role in the global oil market — not only as the world’s largest oil exporter but also the only country with significant spare capacity — Saudi Arabia has, in line with its longstanding commitment, increased its oil production to ease upward pressures on global oil prices. The commitment to provide $ 15 billion in additional resources for the IMF has also contributed to global stability by increasing the funding available for all countries encountering financing needs, the IMF report added.