Saudi Arabia's balance sheet is forecast to weaken further as the government deficit, while shrinking from the peak of 13.8 percent of GDP in 2015, remains high in 2016 and 2017, Fitch Ratings has said.
The ratings agency said the deficit is likely to be 11.2 percent and 6.8 percent of GDP respectively this year and next, before falling to 2.4 percent in 2018.
The improvement of the deficit will primarily be the result of rising oil prices, but the government's National Transformation Programme (NTP), presented in June, will also have an important impact, Fitch said as it affirmed Saudi Arabia's long-term foreign and local currency issuer default ratings (IDRs) at 'AA-' with negative outlooks.
Fitch said during the first seven months of 2016, overall government deposits at the Saudi Arabian Monetary Agency (SAMA) declined SR92 billion to SR1,070 billion or around 46 percent of GDP. It added that general government debt is likely to rise to 14.7 percent of GDP by end-2016, from just 1.6 percent in 2014 but still well below the 'AA'-category median of 38.7 percent.
The NTP contains ambitious fiscal targets, including an increase in non-oil government revenues to SR530 billion in 2020, a reduction in public payroll expenditure, a decrease in annual water and energy subsidies and a reduction in expenditure on public sector salaries and wages.
Fitch said the economic impact of such a fiscal tightening would be so severe that the fiscal objectives "will probably have to be scaled down".
The government has already re-prioritised investment spending, cancelling some projects, and raised visa fees. It will raise 'vice taxes' on energy drinks, soda drinks and tobacco and is committed to introducing a value-added tax at a rate of 5 percent by 2018.
The ratings agency added that fiscal consolidation is likely to be the driver behind the expected slowdown in GDP growth to 0.9 percent in 2016, from 3.5 percent in 2015, with only a modest recovery to 1.1 percent in 2017 and 1.6 percent in 2018.
The scaling down of infrastructure spending, combined with payment delays, has hit the construction sector hard, and the government may decide to bail out some of the large contractors.
The government hopes that bringing in private-sector participation in infrastructure development will help to provide some support but this is unlikely to be sufficient and will take time, Fitch said.
It added that the fiscal consolidation measures may lead to rising disaffection, but widespread domestic unrest is unlikely.