With the aim of repairing finances squeezed by low oil prices, projects worth more than $20 billion is planned to be cancelled and ministry budgets by a quarter are to be slashed by Saudi Arabia, reported Bloomberg citing people familiar with the matter. Analysts expect these steps would slow economic growth.

The sources reportedly claimed that thousands of projects valued at about 260 billion riyals ($69 billion) are being reviewed and could be cancelled. The measures may include transport, housing and healthcare projects, according to two of the people, which would impact the budget for several years. The sources also said that the review is being palnned by the government within six months.

Bloomberg also quoted sources who claimed that merging some government ministries and eliminating others are parts of another plan being mulled.

Steps to rein in a budget shortfall that ballooned to 16 percent of gross domestic product last year, the highest among the world’s biggest 20 economies, have been taken under deputy Crown Prince Mohammed bin Salman by the world’s biggest oil exporter. Cutting fuel subsidies and delaying payments to contractors have already been started by the government. The prince also plans to create the world’s biggest sovereign wealth fund and sell a stake in oil giant Saudi Arabian Oil Co., or Aramco.

“The revenue and economic diversification strategy being pursued will only start to yield results over the medium- to long-term. In the short term, it is a question of living with lower oil prices by cutting some capital spending, and financing what’s left via debt sales and drawing down foreign reserves,” Raza Agha, VTB Capital’s chief economist for the Middle East and Africa, said.

While officials at the Ministry of Economy and Planning weren’t available for comment when contacted by Bloomberg, the Finance Ministry declined to comment.

Other ways to bolster its finances are also being looked out for by the kingdom. Sale of its first international bond is being planned early next month. Sources reportedly said that this could raise more than $10 billion. According to targets set out in the transformation plan released in June, from the present 7.7 percent, public debt levels will increase to 30 percent of economic output by 2020. The growth prospects have been weighed down by spending cuts and the drop in oil prices to below $50 a barrel.

According to data compiled by Bloomberg, the gross domestic product is forecast to expand 1.5 percent. That’s the slowest pace for more than a decade excluding the 2009 global recession. The medium-term growth would be hardly enough to lower one of the world’s highest youth unemployment rates as it would settle around 2.5 percent, the IMF estimates.

“Much lower government spending will translate into lower private sector growth, which has already started to be seen in economic indicators this year. It’s a double-edged sword as the government has to rationalize spending because of the drop in oil revenues,” said John Sfakianakis, director of economic research at the Gulf Research Center.

Mohammed Alsuwayed, the head of capital and money markets at Adeem Capital in Riyadh said that the projects cuts by the government “just kill the sentiment that was building during the past few days with Saudi stocks.”

“The market should trade down on that today and tomorrow,” Alsuwayed added.

(Adapted from Bloomberg)

Categories: Economy & Finance