* 2016 deficit to be much smaller than originally projected
* May create room for more spending in 2017
* Higher oil prices, non-oil revenues steps will help
* Graphic on Saudi spending, revenue and reserves: reut.rs/1m6RPS1
By Marwa Rashad and Andrew Torchia
RIYADH/DUBAI, Dec 13 (Reuters) - Saudi Arabia’s 2017 state budget is likely to show Riyadh has shrunk a huge deficit caused by cheap oil faster than expected, which may let it spend more to bolster a shaky economy
This year was one of the most painful for the Saudi economy in decades. Growth slowed sharply and speculators bet against the Saudi currency as the government fought to curb a deficit that totalled a record 367 billion riyals ($98 billion) in 2015.
But when Riyadh reveals next year’s budget in about two weeks, it will claim more progress in controlling its finances than many thought possible 12 months ago, bankers and analysts in touch with Saudi economic officials said.
That may allow it to focus on another key reform plank: diversifying the economy beyond crude exports and fostering private sector growth.
“Next year there will be a much more balanced budget and increased focus on creating jobs and development projects that directly help the economy,” a senior Saudi banker told Reuters.
Economist Ihsan Bu Hulaiga forecast the budget would be designed to “move out from low economic growth to higher growth”.
Drastic spending cuts overseen by King Salman’s son, Deputy Crown Prince Mohammed bin Salman, appear to have cut the deficit significantly beyond the 326 billion riyals originally planned in the 2016 budget.
Several top Saudi economists predicted on average an actual 2016 deficit of 240 billion riyals. That would be about 10 percent of gross domestic product - still unsustainable in the long term, but down from 15 percent last year.
Spending cuts in 2016 included emergency orders to ministries to cut the value of contracts, months-long delays in the state’s payment of debts to private sector companies, and unpopular cuts to state employees’ allowances.
Meanwhile, government departments had been asked to propose cuts to projects aimed at revamping infrastructure and diversifying the economy before they even launched, an official source said.
Because the spending cuts have already been so drastic, further falls in the deficit may have to be slower. But the government may have created room for itself to loosen the purse strings slightly next year.
The rally in oil prices in response to last month’s OPEC agreement to cut output, with Brent crude now at $55 a barrel compared to an average of $45 this year, should help.
Also, steps introduced this year to boost non-oil revenues, although small compared to the overall budget, will be in place for the entire year in 2017. These include higher municipal and visa fees, and a tax on undeveloped urban land.
Meanwhile, savings may come from further anticipated cuts to domestic energy subsidies. Saudi Fransi Capital predicted a 20 percent hike in electricity tariffs and a 40 percent rise in gasoline prices.
Riyadh, however, might not raise the cost of natural gas feedstock for firms, as it did in the 2016 budget, to support the petrochemical industry, some analysts said.
Some economists think next year’s budget may be modestly expansionary in nominal terms.
The 2016 budget plan projected spending of 840 billion riyals, down from actual spending of 975 billion riyals in 2015. ($1 = 3.7505 riyals)
Additional reporting by Tom Arnold in Dubai and Katie Paul in Riyadh; editing by Richard Lough