This week’s Global Markets Update key takeaways are :

  • Bonds yields in advanced economies rose as markets shifted to risky assets ahead of the holiday season
  • US dollar weakened slightly against most currencies amid thin trading volumes
  • Global equities broadly rose on positive economic data but trading was thin on a short working week; GCC equities were mainly up on slightly higher oil prices
  • US oil prices rebounded strongly as inventories declined and the number of drilling rigs fell
  • Trading is likely to be thin during the holiday season; the Saudi budget and GDP data in a number of MENA countries could impact regional markets.

Saudi Arabia’s 2016 Budget of spending cuts and deficit

Reuters reported on 28 and 29 December 2015, that Saudi Arabia has plans to bring its budget deficit to acceptable levels by cutting spending, eventually start driving all future revenue towards other sources than oil and for instance by privatising schemes that could temporarily dry the market of excess liquidity.

The proposed spending cuts, close control of gas stock, increases in fuel and electricity prices, and rises and / or introduction of taxes are expected to hurt sectors such as construction and petrochemicals, and slow economic growth next year but the country’s stock market together with other Gulf stock markets may react positively after the announcement of the 2016 Saudi budget.

Saudi Arabia’s finance market fell sharply in early trade on Tuesday 29 after the new state budget was announced.  The index dropped in effect 3% in the start of the morning trade with petrochemical firms particularly taking the brunt of it, as their margins will be squeezed by more costly feedstock.

The price of unleaded 95 petrol increasing overnight by no less than 50% was predictable in view of the current conjecture but subsidies for all petroleum products, electricity and water were not.  These changes in the budget, if oil prices stay low, may obviously be not just the start of a multi-year period of fiscal austerity but most probably a change that is to stay for good as per the local media.  They also mean that the authorities are decidedly not shying away from any volatile socio-political situation but are rather confronting it head on.  Doing so would normally cheer up all investors not only in Saudi Arabia but in the rest of the Gulf countries that are naturally linked to the Saudi economy.

All other GCC countries also undergoing similar circumstances are taking same steps in a climate where their banks’ profits are expected to come under pressure in 2016.  Below is an IMF proposed last September graph of the Saudi Budget as compared to the country’s GDP over the years 2011 through 2020.