Riyadh- An economic report published on Tuesday forecast that adjusting government spending in Saudi Arabia, especially in line with capital spending, in addition to improvement in non-oil revenues might come less than the estimated budget deficit of 2016-2017.
The report issued by Jadwa Investment, noted that the commencement of an international sovereign bond issuance program will alleviate the liquidity pressure in the Saudi domestic banking system and lead to lower foreign-exchange reserve withdrawals to finance the deficit.
The report confirmed that inflation in the Kingdom has been on a decelerating trend so far this year, which is reflective of the slowdown in consumption. According to Jadwa Investment’s report, this is reflective of the slowdown in consumption, and can be attributed to subdued inflation rates among the Kingdom’s main trading partners.
The report further mentions that concerns over global economic and regional political risks – as well as – a prolonged period of lower oil prices, continue to be the main risks to the forecast.
Continued volatility and tightening of global financing conditions could be triggered by an upward shift in market expectations of official interest rates, it added.
Jadwa Investment’s report stated that OPEC supply growth is less clear, with the organization recently stating that it will aim to reduce output to a range of 32.5 to 33 million barrels per day (mbpd) with detailed individual countries quotas being decided in a formal OPEC meeting in November.
An agreement could, in theory, bring about market re-balancing much quicker.
If OPEC cuts production to 32.5 mbpd, and assuming all other things held constant, oil markets would tighten more quickly and considerably, according to the report.
In reality, the issue is complicated and accompanied with a number of risks, not only of a lack of an agreement in the November meeting, but also to implementing the cuts, if agreed.
Jadwa Investment’s report also stated that this agreement could push Brent oil prices up to $60 per barrel (pb), but it could also result in demand declining and U.S. shale oil rebounding.
There are a multitude of issues that will have to be resolved in order for OPEC to implement cuts in its November meeting. One of the main issues will be, which countries to exclude – if any – from production cuts.
Nigeria, Libya and Iran have all pushed for exemptions.
Any exemptions for these countries will need an equivalent or higher cut in production from other OPEC members, which presents another challenge to the deal.
Alternatively, OPEC could choose to simply adjust the targeted ceiling of the cut (between 32.5 to 33 mbpd) upwards to order account for additional output from all three countries, but this would lessen the market impact of the proposed cuts.