Saudi stock market index falls sharply after 2016 budget announcement

Saudi Arabia’s stock market fell sharply in early trade on Tuesday after a 2016 budget, announced late on Monday, that included spending cuts, rises in fuel, gas feedstock and electricity prices, and tax rises.

The index dropped 3 per cent in the opening 15 minutes of trade with petrochemical firms particularly hard hit, as their margins will be squeezed by more costly feedstock.

The gauge 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. The kingdom reduced energy subsidies and intends to cut spending in 2016 to 840 billion Saudi riyals from 975bn riyals this year. Contracts used to speculate on the riyal in the next year jumped the most since 2007.

Saudi Basic Industries, the biggest petrochemical producer, tumbled 8.3 per cent while Saudi Kayan lost 4.8 per cent.

“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 US$900 million, said before Saudi Arabia announced its budget.

Oil prices hovering near their lowest levels since 2004 and a decision to plunge into a war in neighbouring Yemen are straining the kingdom’s finances. That has forced Saudi Arabia to tap its foreign reserves, which dropped for a 10th straight month in November to a three-year low, and to sell bonds for the first time since 2007 in 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 on budgetary concerns.

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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