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Saudi reforms in oil prices to bring current deficit to balance

Saudi reforms in oil prices to bring current deficit to balance

RIYADH: Ongoing fiscal reforms and higher oil prices could bring Saudi Arabia’s current account deficit nearer to balance over the coming years as the external breakeven oil price hovers around $60/barrel, a report said.

The drop in SAR Fx forward points reflects this but capital outflows and fiscal slippage remain risks, said the Bank of America Merrill Lynch’s Emerging Insight report.

The balance of payments (BoP) data for the kingdom suggests financial outflows are continuing, likely reflecting private sector hedging and official outward flows, the report said.

Methodological compilation issues mean the size of such outflows may be difficult to ascertain accurately. Within the official sector, the outward investment mandate of the Public Investment Fund (PIF) needs to be carefully managed in order not to pressure reserves.

If outflows persist, authorities may consider resorting to administrative measures as the commitment to an open capital account is central to attracting foreign investment under the economic reform programme, said the report prepared by Bank of America Merrill Lynch Mena economist Jean-Michel Saliba and the bank’s GEM Fixed Income Strategy & Global Economics research team.

Fiscal discipline over the first nine months of 2016 has helped narrow the current account deficit. The current account deficit stood at 5.2 per cent of GDP over the period, compared to 8.7 per cent of GDP in 2015.

Furthermore, the current account balance recorded a small surplus of $2.1 billion in the third quarter of 2016, while the trailing current account deficit stood at $46.7 billion (7.6 per cent of GDP).

Government fiscal consolidation has been the main driver of external balances, alongside oil prices. The quarterly trade surplus improved in 3Q16, standing at $19.5 billion (oil prices of $45.8/bbl), compared to a low of $3.3 billion in 1Q16 (oil prices of $34.5bbl). Quarterly imports compressed materially, plunging by 32 per cent year-on-year to $25 billion, down from a quarterly peak of $40 billion. The invisibles balance has also improved, largely on the back of lower government payments for goods and services and stabilization in outward remittances.