If oil prices fall back as we expect, Saudi Arabia’s government is likely to run large budget deficits and see a sharper rise in the public debt ratio than is widely anticipated. The strength of the Saudi government’s balance sheet means that it has a long runway to cut spending and to build and diversify revenues. But in the meantime, lower oil prices are likely to cause the spreads on government bonds over its peers to widen, perhaps by around 20bp or so.
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