FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, suggests that the negative impact from the lower price of crude oil was evident in Saudi Arabia yesterday after the government revealed a budget deficit totalling about 15% of GDP for this year as oil revenues fell by around 23%.
Key Quotes
“It prompted the government to unveil an austerity budget for next year including spending cuts, subsidy reforms and a call for privatisations. The first reforms effective from today include higher gasoline prices, a rise in electricity tariffs for the wealthiest consumers, a modest increase in water costs for all, and changes to all energy prices for industrial users. The budget projects cutting spending from Sr975 billion in 2015 to Sr840 billion in 2016. The deficit is expected to narrow from Sr367 billion in 2015 to Sr326 billion in 2016.”
“The sharp adjustment lower in the price of crude oil has also encouraged speculation that Saudi Arabia may exit its peg against the US dollar which has been in place since June 1986. However, there has been no indication this is officially under consideration. The peg has remained in place during prior sharp adjustments lower in the price of crude oil and Saudi Arabia’s FX reserves remain significant at over USD600 billion. Speculators looking for a devaluation of the riyal are likely to remain disappointed in the year ahead. However, it is a tail risk which could result in a broader impact on foreign exchange market performance.”
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