On the face of it, estimated 2016 budgetary spending of SAR840 billion is only 2% lower than the 2015 level.  However, it is important to note that actual 2015 fiscal year spending decreased by 14.5% from the 2014 level as a result of measures already taken to curtail spending; and also, in the 2016 budget there is a provision of SAR183 billion for budgetary support expenses.  These support expenses could easily be overlooked should circumstances warrant. This, in our view, underlines a contractionary tone.

Upon the initial announcement of the 2016 budget, market participants reacted cautiously suggesting that the budget projections were seen to be “as expected”.   However, several mid-night issued government decrees demonstrated the government’s desire for some serious burden sharing among the various beneficiaries of the Saudi landscape. Further, in our view, demonstrating a contractionary tone.

Below are some of the highlights which further supports this impression:

• Energy product prices, as well as petrochemicals’ feedstock prices, have been significantly increased
• Electricity tariffs have been revised upward across the board, including for housing and industrial sectors
• The price for water and sanitation services has been revised upward
• Capex spending has been slashed

On the revenue side, budgeted 2016 revenue of SAR514 billion is projected to be 28% lower than the 2015 level. The implied oil price of USD34 / barrel for 2016 is 40% lower than the implied price used in the 2015 budget.

The budget deficit estimate for 2015 is now SAR155, and the 2016 budget deficit target is SAR 326 billion (equivalent to 16% of the GDP).                                  

In terms of non-oil economic growth, in 2016 we expect a slowdown to 2.7% from an estimated 3.3% in 2015.

As a result of the budgetary measures, we see the following negative impact on profits for the below key market sectors:

Petrochemicals – down 12 – 15%

Cement – down 10 – 12%

Consumers – down 5 – 8%

Banks – indirect impact of capital spending reduction on credit growth                    

During 2015, the Saudi government issued public debt totaling SAR98bn with total public debt estimated at SAR142 billion by the end of the year. This is equivalent to 5.8% of 2015 GDP versus total public debt of SAR 44 billion or 2% of GDP in 2014. This level of debt is exceptionally low by international standards however the Ministry of Finance’s statement makes it quite clear that looking forward, all financing options will be considered to plug the budget deficit including borrowing in the international capital markets so as not to effect domestic liquidity. International borrowing by the Saudi government could potentially crowd out issuance by capital intensive government related entities (“GREs”) such as Saudi Electricity (“SECO”) which has been a regular borrower in the international capital markets and has historically been viewed as a proxy for Saudi Government exposure. This perception is likely to change in 2016 as the Saudi government broadens its funding base and international investors have access to direct Saudi government exposure. If the international debt issuance is not managed carefully, this could lead to higher funding costs for Saudi GREs and private sectors debt issuers.