The Saudi Arabia Government is taking constructive steps by abolishing subsidies on fuel and other utilities to curb the deficits and improve the fiscal situation. Check out the MENA region article by Aranca’s Investment Research experts.

1. Abolishing Subsidies — Saudi Arabia’s Quest to Curb
Deficit
While low crude prices were fiscal boons to countries such as India and China, oil producing countries
sweated out lower revenues, curbed expenditures, and reporting deficits.
Saudi Arabia — the OPEC’s largest oil producer — was struck by the slump over 2014 - 2015 and
grappled with significantly lower revenues from crude oil.
The 28th of December 2015 was a turning point for the Kingdom, with the Saudi government resorting to
an increase in the prices of gasoline, electricity, diesel, kerosene, as well as water and sewage treatment
services.
This is the Saudi government’s first concrete step towards abolishing subsidies while improving its fiscal
situation.
Government Expenditure – Focus on Spending to Continue
The 2016 Saudi Ministry of Finance budget suggests that government spending continued to grow in
2015, despite lower revenues from crude oil.
Actual expenditure in 2015 is expected to reach SAR 975bn, widening the deficit to SAR 367bn (during
2014, Saudi government reported deficit of SAR 66bn) which is about 15% of GDP. The 2016 budget
estimates combined revenues of SAR 514bn, while government expenditure is budgeted at SAR 840bn,
with a deficit of SAR 326bn.

2. Budgeted expenditure for 2016 is about 14% lower than that of 2015, primarily due to lower oil revenues.
There is a contingency provision of SAR 183bn however, and the government may resort to bond issuance
(as it did in 2015, with bonds totaling SAR 98bn) should the need arise.

3. Fuel Reforms – A Step Toward Rationalization
The Saudi government announced a 67%+ price hike in Octane 91 (low-grade) petrol and 50%+ price
hike in Octane 95 (high-grade unleaded) petrol on the 28th of December, 2015.
The government also hinted that prices of other fuels such as natural gas, diesel, kerosene, Arabian light
and heavy crude oil, heavy fuel oil, ethane, and butane would be hiked, with revised prices applicable from
the 11th of January, 2016. Utilities such as electricity, water and sewage treatment would also become
costlier as their tariffs would be revised.
Crude Oil Prices – No Near-term Surge Expected
A weak but stable demand across developing countries, lower than expected demand from China, higher
crude availability from non-OPEC countries, and the continued oversupply from OPEC, have made global
oil prices less vulnerable to any intermittent shocks.
OEPC in its recent World Oil Outlook 2015 suggested that the OPEC reference basket may reach USD
80/bbl by 2020.
Subsidy Regime to Diminish Over the Next Few Years
Saudi Arabia’s decision to hike fuel prices is a constructive step toward reducing fuel subsidies.
Fuel prices in Saudi Arabia should be in sync with international prices over the next few years. Given the
grim outlook for crude prices right now, the government shouldn’t have a hard time implementing this
decision. The reduced subsidies would not only help curb deficits, but also reduce the excessive
consumption of a precious natural resource.
We believe that rather than reduce expenditure on development projects, the Saudi government will try
to tap additional revenue streams from non-oil segments such as hiking fuel prices, levying taxes, and so
on, which would help the government exchequer keep pace with its expenditure.
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