According to Bloomberg, the Saudi government is conducting a review of capital spending plans with advisors, said an industry expert, adding that the government is looking to delay or shrink some infrastructure projects, and may be contemplating budget capex cuts of 10 per cent or more.

“Current spending on wages would not be affected,” added Jean-Michel Saliba, Mena Economist at Bank of America (BofA) Merrill Lynch.

“This is an important development, which confirms two points we have flagged,” Saliba explained, commenting on the research report, authored by the Global Fixed Income Strategy and Economics Team at Bank of America Merrill Lynch.

“Spending cuts are likely to follow oil price weakness, as per historical norms, despite the variable lag time. These cuts will focus primarily on capex first. In addition, the cuts will likely be gradual, rather than sharp, given the accumulated savings.

“The impact of capex cuts on the national economy is mitigated by the employment of foreign labour in related sectors, in our view. One implication on the policy-making intent is that of deflating the economy through the fiscal side, which reinforces the government’s commitment to the USD peg, in our view,” Saliba added.

“The scale of spending cuts being contemplated would still imply a budget deficit in the low double digits next year, in our view. However, the largest part of the decline in the deficit is due to the phasing out of the one-off Royal Handouts (worth 4 per cent of GDP).

“Large budget deficits are likely to persist over the medium term, in our view. This is likely to erode buffers and raise questions on the sustainability of the fiscal stance, in our view. As such, the 2016 budget is likely critical and will be keenly scrutinized by investors and rating agencies,” Saliba explained.

Dr Ahmed Alkholifey, Sama (Saudi Arabian Monetary Agency) deputy governor for research and international affairs, reaffirmed that the authorities are committed to maintaining the USD-SR peg at 3.75.

“Verbal intervention is in line with our view regarding the strong policy commitment to the USD peg. This is the first line of defence for Sama, in our view given the move in recent weeks in the FX forward points to above-Lehman highs,” he said.

“Sama could intervene directly in the FX forward market to lower the points, but this type of intervention is likely to remain infrequent and only contemplated if forward points move much higher toward the 1998 speculative highs. Recall that Sama carried out unsterilized small-scale interventions in 1993 and 1998 in the FX forward market to reduce speculation, at a time it held FX reserves of only 4-9 per cent of GDP over the period,” Dr Alkholifey added. – TradeArabia News Service