Saudi Budget's Estimate for Oil Is Seen as ‘Wishful Thinking’

(Bloomberg) -- Some analysts say Saudi Arabia’s 2019 revenue forecast is surprising because they estimate it to be based on a relatively high price of oil.

The plan defies “the laws of arithmetic,” said Ziad Daoud, the Dubai-based chief Middle East economist at Bloomberg Economics. The government’s projections may be based on a crude price as high as $80 a barrel in 2019, and it would have to climb to $95 a barrel to balance the budget, he said. Brent crude traded near $56 a barrel on Wednesday.

The immediate reaction from stock investors is lackluster, with the main Saudi gauge falling 1.1 percent on Wednesday. Yields on Saudi Arabia’s $5 billion of bonds due 2028 climbed five basis points to 4.31 percent.

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Bloomberg’s Daoud:

  • The budget “defies the laws of arithmetic. It projects a 9 percent increase in revenue against the backdrop of lower oil prices and production cuts by OPEC members”
  • “Withdrawing subsidies is unlikely to plug that gap. This leaves the government with a choice -- either lower spending and accept slower economic growth or miss its deficit target. We expect it to opt for the latter”

Jason Tuvey, the London-based senior emerging market economist at Capital Economics:

  • “Saudi Arabia’s budget for 2019 outlined further fiscal loosening, but the government seems to be relying on optimistic assumptions for oil prices to rise to almost $80 per barrel,” he wrote in a report titled “Saudi budget: wishful thinking”
  • “Deciphering the Saudi budget is never an easy task but, reading between the lines, it seems to point to a third consecutive year of fiscal loosening,” adding that he expects a budget deficit close to 10 percent of gross domestic product
  • Still, a “wider-than-expected deficit would not cause too many problems” as the government finances it either through drawing down reserves or issuing more debt.
  • Expects austerity to resume in the second half of 2019, which will weigh on activity in the non-oil sector

Mohamed Abu Basha, the head of macro analysis at Cairo-based EFG-Hermes investment bank:

  • “Like-for-like spending is set to contract by 2.2 percent year-over-year in 2019. Hence, the fiscal stance is largely neutral, which, in our view, comes as no surprise, given the sharp correction in oil prices”
  • As the kingdom plans a 20 percent increase in capital spending, he foresees “challenges” of realizing “such ambitious investment spending”
  • “As in the previous year, when the government announced an aggressive capex plan, we do not see much evidence in the project award cycle that gives us comfort that such pace of spending can take place at least before mid-2019”

Tim Ash, a London-based strategist at BlueBay Asset Management LLC:

  • “Clearly, given the political setting, there is the desire to cushion the impact of fiscal adjustment”
  • Debt “issuance will depend on where oil prices go. Lower oil prices will mean more issuance. That said, their strategy is to issue more debt locally, and cut external issuance”

Richard Segal, senior analyst at Manulife Asset Management in London:

  • The budget estimates are very close to market’s consensus forecasts, and this would support bonds “to some extent”
  • “If there was a budget surprise, it probably would have been toward higher spending,” explaining why budget estimates would support bonds

Delphine Arrighi, a London-based emerging-market fund manager at Merian Global Investors:

  • Fiscal slippage is very likely with the risk of more debt issuance next year, because the government’s estimates for oil prices look “very optimistic”
  • She has small allocation to the country in anticipation of index inclusion next year and is looking to add on renewed weakness
    • NOTE: Saudi Arabia and four other Gulf countries will become eligible for inclusion in JPMorgan’s emerging-market bonds indexes from the end of January, potentially attracting billions of dollars in passive inflows

©2018 Bloomberg L.P.