Aramco's performance-based dividend 'to boost Saudi Arabia's medium-term fiscal outlook'

Dividends could be worth an additional 2 per cent of GDP to the government, Jadwa Investment says

Aramco this month said it expected performance-linked dividends to amount to 50 per cent to 70 per cent of its annual free cash flow. Reuters

Saudi Arabia's medium-term fiscal outlook is brighter following Saudi Aramco's plans to start paying a performance-related dividend, likely from the first quarter of next year, Jadwa Investment has said.

The planned dividends could be worth an additional 2 per cent of gross domestic product to Saudi Arabia's government, according to a budget report by Jadwa on Wednesday.

Aramco this month said it expected such performance-linked dividends to be in the region of 50 per cent to 70 per cent of its annual free cash flow, net of the base dividend and other amounts, including external investments, to be determined with the annual results.

"The medium-term outlook for the fiscal finances has improved with Aramco’s announcement that it intends to start paying a performance-related dividend probably from Q1-24 onwards," Jadwa said in its report.

"The performance-related dividend has improved the 2024 outlook."

Jadwa's report comes after Saudi Arabia reported a budget deficit of 2.91 billion Saudi riyals ($770 million) for the first quarter of the year after spending on the kingdom's economic diversification projects increased.

Expenditure from January to March rose by 29 per cent annually to 283.85 billion riyals, driven by a 75 per cent yearly increase in capital expenditure and a 52 per cent rise in social benefit expenses.

Meanwhile, total revenue during the period grew by 1 per cent annually to 280.9 billion riyals as non-oil revenue rose by 9 per cent, year on year, to 102.3 billion riyals.

In the near term, Saudi government spending is forecast to be higher than Jadwa originally expected this year.

"If the first-quarter figure was annualised, then expenditure would be just 1.9 per cent over budget, but this is unrealistic given that the fourth quarter almost always shows a spike in spending," the report said.

Meanwhile, non-oil revenue is expected to show "decent growth", as ever-expanding consumption boosts tax receipts, it said.

Looking ahead at the kingdom's expected oil revenue, this will be affected by the estimated 500,000 barrels per day cut to Saudi production from this month as part of a broader Opec agreement, but Aramco's planned performance-related dividend has improved the outlook for next year, Jadwa said.

Media reports of plans to offload more Aramco stock could result in a "modest hit" to the central government’s future oil revenue, depending on the size of any divestment, the report said.

Bloomberg last week reported the kingdom has been working with several advisers to study the feasibility of a follow-on offering on the Riyadh exchange, the newswire said, citing sources.

"On the basis that any stock sale does not go ahead in 2023, a small fiscal deficit (of maybe a couple of percentage points of GDP) appears likely this year, but with a potential return to surplus in 2024," Jadwa said.