Saudi Stocks Drop as World's Biggest Oil Exporter Cuts Subsidies -
Saudi Arabian stocks declined after the kingdom announced one of its biggest shakeups in economic policy.
The Tadawul All Share Index sank 0.9 percent at the close as the gauge of petrochemical companies slid to the lowest level since July 2009. The kingdom reduced energy subsidies and intends to cut spending in 2016 to 840 billion riyals ($224 billion) from 975 billion riyals this year.
Petrochemical companies are among the first to feel the pressure because a "cut in fuel subsidies will drive up the costs,".
Oil prices hovering near their lowest levels since 2004 and a decision to plunge into a war in neighboring Yemen are straining the kingdom’s finances. That’s forced Saudi Arabia to tap its foreign reserves, which dropped for a 10th straight month in November to about $630 billion, a three-year low, and to sell bonds for the first time since 2007 to help plug a budget gap.
The desert nation had its sovereign rating cut for the first time in October when Standard & Poor’s lowered it one level to A+, the fifth-highest investment grade, citing budgetary concerns. The nation’s stock index is headed for its worst year since 2008, even after the bourse in June allowed foreign institutional investors to trade shares directly for the first time.
Saudi forward contracts, which are used to bet whether Saudi Arabia will allow its dollar-pegged currency to weaken in the next 12 months, rose as much as 280 points to 755 points, the highest level since March 1999. They pared the increase to 145 points as of 4:01 p.m. in Riyadh.
The government recorded a budget deficit of 367 billion riyals in 2015. That’s about 16 percent of gross domestic product, according to the National Bank of Abu Dhabi, but below the 20 percent forecast by the International Monetary Fund. For 2016, the government expects the deficit to narrow to 326 billion riyals. Revenue is forecast to decline to 514 billion riyals from 608 billion riyals.
“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, which manages about $900 million, said by telephone before Saudi Arabia announced its budget.
The kingdom announced on Monday that it was raising domestic fuel, power and water prices, according to the official Saudi Press Agency.
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