Spending cuts reduce Saudi Arabia's 'fiscal vulnerabilities' to oil price fluctuation

The kingdom’s ability to balance its budget in the next three years is now more likely with public debt remaining below 30 per cent of gross domestic product

ISTANBUL, TURKEY - OCTOBER 05: The Saudi Arabia national flag is seen above the Saudi Arabia Consulate on October 5, 2018 in Istanbul, Turkey.  Saudi Consulate officials have said that missing writer and Saudi critic Jamal Khashoggi went missing after leaving the consulate, however the statement directly contradicts other sources including Turkish officials who believe that the writer is still inside and being held by Saudi officials. Jamal Khashoggi a Saudi writer critical of the Kingdom and a contributor to the Washington Post was living in self -imposed exile in the U.S.  (Photo by Chris McGrath/Getty Images)
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Lower government spending next year will reduce Saudi Arabia's medium-term fiscal vulnerabilities to lower oil prices and the kingdom is on course for a balanced budget by 2023, the Institute of International Finance (IIF) said.

Opec’s biggest oil exporter is now on a “much more secure” fiscal trajectory than a few months ago given the efforts to restrain spending, said Garbis Iradian, IIF's chief economist for the Middle East and North Africa.

The kingdom’s ability to balance the budget in the next three years is now more likely with public debt remaining below 30 per cent of gross domestic product (GDP) and IIF’s assumption of oil being slightly above $60 per barrel. However, a significantly lower price would mean the budget deficit remains large.

Preliminary estimates by Saudi Arabia have put actual spending in 2019 at 1.05 trillion Saudi riyals (Dh1.03tn), well below the budgeted 1.11tn riyals. While defence spending slightly exceeded the budgeted amount, this was more than offset by lower capital expenditures.

Despite lower oil prices in 2019, revenues have risen on the back of a special oil dividend transfer from Saudi Aramco, which led IIF to revise its estimate of the kingdom's fiscal deficit for 2019 to 4.7 per cent of GDP from 6.2 per cent, it said.

“We have also lowered our forecast for the fiscal deficit for 2020 from 7.5 per cent of GDP to 6.6 per cent in 2020,” Mr Iradian said. “This still represents a widening compared with 2019 due to lower oil revenues.”

The Public Investment Fund, the sovereign wealth fund of Saudi Arabia, which is the key pillar of Riyadh’s economic diversification agenda, has its coffers full after Saudi Aramco’s initial public offering and is taking centre stage in terms of the public spending in the country. It is already behind the mega $500 billion (Dh$1.8tn) futuristic Neom economic free zone and the several other giga-projects in the country.

PIF is one of the biggest investors in the local equity markets and holds stakes on behalf of the government across sectors including banking and finance, industries, defence and mining.

The 2020 budget announced earlier this month sets expenditures at 1.02tn riyals, which is 2.7 per cent lower than the preliminary estimates for 2019. Given the recent Opec+ agreement, and as the Jizan refinery became fully operational, IIF expects oil production to increase slightly in 2020, following a decrease of 3 per cent in 2019.

“Based on oil revenues included in the 2020 budget and our assumption of crude oil production, we estimated the oil price assumption in the 2020 budget at $60 per barrel,” Mr Iradian said.

Despite fiscal headwinds, non-oil growth is expected to remain solid at 2.7 per cent, supported by monetary easing and further recovery in private sector activity, which will be supported by interest rate cuts, according to IIF.

The kingdom’s Purchasing Manager’s Index, a composite gauge reflecting the health of the non-oil economy, rose to 58.6 in November - the highest in four years -  and point of sale transactions, a proxy for retail sales, continues to expand.

Credit in Saudi Arabia has also picked up to 3.5 per cent year-on-year in October, with a recovery in lending for construction and manufacturing.

“We expect overall real GDP to shift from a contraction of 0.3 per cent in 2019 to a growth of 1.9 per cent in 2020, as crude oil production is projected to increase slightly,” Mr Iradian said.