Daily Management Review

Spending and Subsidy Cut Announcements by Saudi Government Forces Stocks Drop


12/30/2015




Spending and Subsidy Cut Announcements by Saudi Government Forces Stocks Drop
After the announcement by Saudi Arabian of one of its biggest shake-ups in economic policy, stocks of the country were poised for the steepest decline in two months. Forward contracts for the riyal surged.
 
There was a dip of Tadawul All Share Index on Wednesday in Riyadh. Even after the bourse in June allowed foreign institutional investors to trade shares directly for the first time, the gauge is headed for its worst year since 2008.
 
While announcing to cut spending in 2016 to 840 billion riyals ($224 billion) from 975 billion riyals this year, the kingdom also announced the reduction of energy subsidies. Contracts used to speculate on the riyal in the next year jumped the most since 2007.

“Government expenditure is a key driver of growth in Saudi Arabia, so a cut in spending will certainly feed through to domestic output and earnings,” Akber Khan, the director of asset management at Doha-based Al Rayan Investment said.
 
Al Rayan Investment manages about $900 million said before Saudi Arabia announced its budget.
 
The finances of the kingdom have been strained aver since the oil prices started hovering near their lowest levels since 2004 and a following decision to plunge into a war in neighboring Yemen.
 
This financial strain has forced the Saudi authorities to sell bonds for the first time since 2007 and to tap its foreign reserves, which dropped for a 10th straight month in November to a three-year low in an effort to plug a budget deficit.
 
Rating agency Standard & Poor’s had lowered the sovereign rating for the desert nation on budgetary concerns for the first time in October.
 
Saudi forward contracts jumped 250 points to 725 points, poised for the highest level since March 1999. Forward contacts are used to bet whether Saudi Arabia will abandon its peg to the dollar in the next 12 months.
 
The budget deficit for the country in 2015 stood at about 16 percent of gross domestic product and was valued at 367 billion riyals, according to the National Bank of Abu Dhabi. However this was well below the 20 percent forecast by the International Monetary Fund.
 
The deficit would narrow to 326 billion riyals in 2016, expects the Saudi government. Revenue is forecast to decline to 514 billion riyals from 608 billion riyals.
 
The Saudi government announced the raising domestic fuel, power and water prices during the budget, according to the official Saudi Press Agency.
 
The biggest contributor to declines in Saudi stocks was the Saudi Basic Industries Corp., one of the world’s largest chemicals manufacturers. The company sank 6.1 percent, the most in four months, to 77 riyals. 
 
On the other hand share prices sank to the lowest level since April 2009 for Sahara Petrochemical Co. which also manufactures chemicals. According to a statement to the bourse, the company is assessing the impact of higher gas and power rates, which may be reflected in its 2016 financial data.
 
In its steepest fall in share prices since August, Saudi Electricity Co. dropped 5.7 percent. According to statement to the Saudi bourse, after the government cuts energy subsidies, the company’s income and costs will rise at similar levels.
 
Dubai’s DFM General Index retreated 0.2 percent and the ADX General Index in Abu Dhabi dropped 0.3 percent. Qatar’s QE Index slid 1.1 percent, headed for the biggest drop in two weeks.
 
(Source:www.blomberg.com) 






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