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Saudi Arabia can sustain high spending in medium term

Friday, January 2, 2015

Significance

The 2015 budget statement from the Ministry of Finance provides a glimpse into the government's fiscal policy response to the fall. Saudi Arabia opted not to try to stem the slide by cutting its own oil production on the grounds that this would only benefit less efficient producers, such as US shale oil operators, whose hugely increased output in recent years has been one of the main factors in creating a market glut. However, if low prices persist, the kingdom risks running deficits on its fiscal and external accounts.

Impacts

  • The deficit will be financed by drawing down reserves and issuing new government debt, mainly to Saudi banks.
  • The kingdom is likely to trim its oil output eventually if prices continue to sink.
  • Spending on politically sensitive areas, such as public sector wages and subsidies, will be protected.
  • However, in the long term, the kingdom may need to reduce spending in these areas to maintain its strong financial position.
  • Saudi Arabia may reduce some of its foreign aid payments to limit overall government expenditure.
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