Saudi Arabia likely to stick with fiscal austerity

There have been signs in recent weeks that the sharp slowdown in the Saudi economy caused by fiscal austerity may have prompted the authorities to look at alternative solutions to deal with the collapse in oil prices. In particular, officials have softened their opposition to a deal to freeze oil output to boost oil prices, while a forthcoming bumper international bond issuance suggests that the appetite for further fiscal consolidation may be waning. But even though austerity seems to be pushing the economy towards recession, we expect policymakers to continue along this path. Ongoing tensions with Iran, as well as a lack of commitment from other oil producers, mean that Saudi officials will be hesitant to sign up to a deal to freeze oil output. And the alternative of a devaluation – which would raise the local currency value of oil revenues – is unpalatable. Indeed, it would require a steep fall in the riyal to make a significant difference to the country’s finances, which would cause inflation to rise sharply. In any case, the Kingdom’s strong balance sheet and the progress made with fiscal consolidation mean that the authorities already have room to ease the pace of austerity. This should underpin a gradual economic recovery over the next twelve to eighteen months.