Country Economic Forecasts > Saudi Arabia

The recently-released 2016 Budget statement unveiled a radical fiscal consolidation programme, which we believe shows a government committed to implementing a prolonged period of subsidy cuts, public wage constraint and new non-oil taxes. Budgeted spending is forecast at 2.3% lower than in 2015, but we expect actual cuts to be much larger, at 11.5%. However, with oil prices now forecast to average just $39 pb in 2016 and driving oil revenues lower, the budget deficit will still narrow only slightly to 14.1% of GDP from 15.5% last year. Meanwhile, the central bank increased interest rates by 0.25% to 0.5% in December following the move by the US Fed. The hike reaffirms the authorities commitment to the dollar peg, which had been under pressure and a further 50bps of rate increases are forecast for this year. All this reinforces our view that non-oil growth will slow to just 1.5% in 2016 from 3.6% last year. With oil production rising just 1%, overall GDP growth will come in at 1.5%, the weakest since 2002.