Saudi Arabia has fiscal deficit cover for 4-8 years

Saudi Arabia has built up sufficient assets to finance any budget deficit, but the cover is limited to between four and eight years, according to an official Arab study.

Despite its massive foreign assets accumulated over the past decade as a result of strong crude prices, the world’s dominant oil exporter could end up being unable to manage fiscal stability if oil prices remain low for a long period of time, said the study by the Saudi-based Arab Petroleum Investment Corporation (Apicorp), an affiliate of the 10-nation Organisation of Arab Petroleum Exporting Countries (Oapec).

The Saudi budget for 2015, which is a little higher than that for 2014, projects expenditures of around $229.3 billion and revenues of $190.7bn, creating a deficit of nearly $38.6 billion or around 5 per cent of 2015 GDP.

Neither the revenue breakdown nor the oil price assumptions underpinning these figures are available, said the study by Ali Aissoui, Apicorp’s senior consultant.

However, what matters here is the expenditure side of the budget, from which we derive a fiscal break-even oil price and thus the time it takes to deplete the country’s fiscal buffer for different oil market price assumptions, said the study, sent to Emirates 24|7.

It noted that Saudi Arabia has neither a dedicated sovereign wealth fund (SWF) nor a fiscal stabilisation fund (FSF).

Instead, the government has trusted its financial surpluses to the Saudi Arabian Monetary Agency (central bank).

In addition to the assets the central bank controls to inter alia meet balance of payments financing needs, it also acts as an asset manager for the Saudi treasury, the study said.

Accordingly, at the end of 2014, Sama’s net foreign assets totaled $724.3 billion and its liabilities in the form of government deposits were $416.2bn.

While the latter aggregate is the most relevant for fiscal operations, it is also the narrowest gauge of the state’s fiscal buffer.

The study estimated that other autonomous government institutions, including pension funds (PPA and GOSI) and the Public Investment Fund, hold together some $335bn of assets that could potentially strengthen the fiscal buffer, creating what it described as a broader fiscal buffer of at least $751.2bn.

According to the study, the calculation of the number of years future deficits could be covered by the fiscal buffer range of $416.2 to $751.2bn can be approached as the relative difference between the fiscal break-even oil price and the oil market price.

“Assuming 2015 budget expenditures and an OPEC basket's price of $60/bbl ─ that is to say current market expectations for 2015 ─ the number of years’ budget deficit cover is found to be between 4.6 years for the narrow fiscal buffer (NFB) and 8.4 years for the broader fiscal buffer (BFB),” the study said.

“Our findings suggest that Saudi Arabia can largely afford current fiscal expenditures; in the worst-case scenario for up to four years. When adding other strings to the budget bow, including a large untapped borrowing capacity, the country’s fiscal power appears almost inexhaustible.

This means that this dominant oil player has indeed the means of its current policy. However, the longer oil prices remain depressed, the more depleted the liquid buffer will be and the more likely it is that efforts to maintain fiscal sustainability will become extremely complicated.”

 

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