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Saudi to review power, fuel subsidies as oil prices drop

GN Logo Abu Dhabi: Saudi Arabia’s subsidy scheme is poised for a change as the country announced that they would be reviewing government support for energy, water and electricity prices in the next five years.

A 2016 budget document by the Ministry of Finance said that reviewing government support is aimed at achieving efficiency in energy use, conserving natural resources, stopping waste and irrational use, and minimising negative effects on low- and mid-income citizens and competitiveness of the business sector.

“The budget clearly says that subsidy should be reduced in the next five years. It is missing on the specific element but the broad direction has been defined,” Sachin Mohindra, Senior-Vice President and Portfolio Manager of Invest AD Asset Management, told Gulf News.

“We would have wanted more clarity but in the next five years, the subsidy regime in Saudi Arabia is going to change.”

The size of the Saudi budget has come down due to low oil prices but no specific cuts have been announced, he added.

“They are being cautious, but the budget has not announced any widespread cuts in capital expenditure.”

The country posted a record $98 billion (Dh359 billion) budget deficit in 2015 due to the sharp fall in oil prices. Revenues were estimated at 608 billion riyals ($162 billion, Dh595 billion), well below projections and 2014 income, while spending came in at 975 billion riyals ($260 billion).

Gulf governments are trying to bring changes in reforms and cut in subsidies as oil prices plunge. In a landmark decision in July, the Ministry of Energy deregulated fuel prices and new pricing policy linked to global prices adopted.

Bahrain’s Minister of Industry and Commerce, Zayed R. Al Zayani, told Gulf News last month they are looking at cutting subsidies on fuel and electricity and adopting a new industrial policy as oil revenues decline.

Dr Mamdouh G. Salameh, an international oil economist and consultant to World Bank, said low oil prices have very adversely impacted Saudi’s budget.

“They used more than $120 billion of their financial reserves and have already borrowed more than $10 billion in the money market with more borrowing to come in 2016. “

“Saudi Arabia will have no alternative but to agree to Opec cutting production by at least 2 million barrels per day to absorb the glut, otherwise the oil price could dive to $30 in 2016.”

Organisation of the Petroleum Exporting Countries (Opec), led by Saudi Arabia refused to cut oil production at their annual meeting in Vienna on December 4 despite pressure from member countries like Venezuela and Nigeria.

Brent, the global benchmark has been dropping for the past few months as global glut persists due to over production and weak demand. From $115 per barrel in June last year, oil prices plunged to less than $40 in recent times with brent trading above $36 on Monday.

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(via Gulfnews.com)

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