Despite diversification efforts, oil revenues vital for Saudi's growth
Now Reading
Despite diversification efforts, oil revenues vital for Saudi’s growth

Despite diversification efforts, oil revenues vital for Saudi’s growth

The increase in oil prices is expected to help the country narrow its budget deficit this year

Avatar

Saudi Arabia’s economy will continue to depend primarily on oil revenues in the medium term despite all its focus on diversification, according to a new report by Fisch Asset Management.

The kingdom has started implementing its Vision 2030 strategy, which aims to see its economy move away from oil.

“While speakers at Abu Dhabi’s World Future Energy Summit emphasised the importance of the kingdom’s economic transformation for fast-tracking investment in renewables, it is clear that improving oil prices will be a key driver for short to medium term growth,” the report stated.

The increase in oil prices is expected to help the country narrow its budget deficit this year.

Recent forecasts have predicted a Saudi budget deficit of $85bn in 2017, down from $107.5bn in 2016, with oil prices predicted to rise to $57/barrel.

On that basis, improving oil revenues resulting from higher prices could account for up to a 25 per cent medium-term fiscal adjustment.

“A normalisation of Aramco’s contributions to the budget in part explain the predicted increase in oil revenues for 2017,” the report said.

Assessing the proposed initial public offering (IPO) of 5 per cent of Saudi Aramco, the latest credit report by Fisch subsidiary Independent Credit Review (I-CV) expects a maximum leverage of 2.5 times.

Aramco has said that it has the largest proven oil reserves in the world, with I-CV suggesting a reserve life of 70 years and yearly production of 3.7 billion barrels of oil equivalent.

Also read: Saudi energy minister still expects Aramco IPO in 2018

Philipp Good, CEO at Fisch Asset Management, said: “As a state-owned company operating in the kingdom’s most important sector, we expect Saudi Aramco to leverage up to a maximum of 2.5 times when it is listed.

“We also think Aramco could qualify for a credit rating of A-, in line with the sovereign rating. Moreover, with the likelihood that oil price improvements will drive a shrinking of the budget deficit by as much as 12 per cent of GDP, we think it is very likely that Saudi Arabia will issue a sukuk in the first quarter of 2017.

“Oil prices and revenues remain a huge contributor to the Saudi economy so it’s encouraging that they have stabilised from previous lows.

“A balanced budget in the kingdom by 2020 is a big challenge but investors, who have seen government initiatives to boost short term growth and introduce medium term fiscal reforms, appear confident. We look forward to seeing how this develops.”

Also read: Saudi Arabia cuts 2016 budget deficit, to boost 2017 spending


© 2021 MOTIVATE MEDIA GROUP. ALL RIGHTS RESERVED.

Scroll To Top