Saudi’s lower Q1 budget deficit due to stronger oil: Fitch

A decline in Saudi Arabia's first quarter budget deficit highlights the positive fiscal impact of higher oil prices on the country, Fitch Ratings said on Tuesday.

The agency expects that the fiscal deficit will continue to fall on the back of higher oil prices and a partial implementation of government reform measures. “This should contain the deterioration of Saudi Arabia's balance sheet,” it said.

Saudi Arabia said its budget deficit in Q1 2017 improved 71 percent year-on-year to SAR 26.2 billion. The major contribution came from higher oil prices, which saw oil revenues more than double to SAR 112 billion.

“The strong Q1-17 outturn supports our view that the budget deficit will fall substantially this year, although the fall for the full year will be less dramatic than for the first quarter,” Fitch said.

“Oil prices reached their trough in Q1-16, and the year-on-year comparison in oil revenues will be less favorable for the remainder of the year,” it added.

The agency, however, added that the partial reversal of a cut in public sector allowances indicates that the reforms are not yet well entrenched. “It suggests the risk of a return to fiscal policy-making where spending is adjusted to short-term revenue fluctuations during the course of the year,” Fitch said.

According to the ratings agency, the implementation of planned cuts in energy subsidies – which will be combined with social benefits for the poor – and of increases in expat levies will be important to gauging the continued commitment to fiscal consolidation.

Fitch said its downgrade of Saudi Arabia's sovereign rating to “A+/stable” in March reflected the “continued deterioration of public and external balance sheets, the significantly wider than expected fiscal deficit in 2016 and continued doubts about whether the ambitious reform program can be implemented.”