Saudi Budget’s Back to Old Ways as Oil Habit Proves Hard to Kick

Saudi Arabia’s new budget math is once more entrenching its reliance on high oil prices, in a riskier path for a country whose fiscal choices matter for politicians and consumers around the world.

(Bloomberg) — Saudi Arabia’s new budget math is once more entrenching its reliance on high oil prices, in a riskier path for a country whose fiscal choices matter for politicians and consumers around the world. 

Following the first surplus in nearly a decade last year, a costly economic makeover under Crown Prince Mohammed bin Salman has prompted a rewrite of projections that now assume deficits until at least 2026. It’s a stark change from plans to keep the budget in the black for years to come. 

The upshot is that the kingdom would need crude at $91 per barrel to balance its books in the second half of the year, according to Bloomberg Economics, an increase of $10 from the first six months. 

“Higher spending that becomes inflexible through oil price cycles may weaken the government’s currently strong balance sheet,” Moody’s Investors Service analysts including Christian Fang said in an Oct. 4 report.

The emerging blueprint suggests Saudi Arabia will have to keep a close grip on the energy market to ensure crude prices stay high. Still, it’s a tricky balance. The kingdom’s reductions in output in recent months helped push prices above $90 a barrel until recently, but they’re also likely to trigger a contraction in gross domestic product this year.

In a pre-budget statement published on Saturday, the Saudi Finance Ministry outlined plans to boost expenditure as part of the crown prince’s program to transform the economy. 

At the same time, it created space for maneuver by saying “there is flexibility in spending, which over the medium term allows the government to extend the implementation period of projects and strategies.”

The latest outlook shows a “clear intent on the part of the authorities to shift to a more expansionary stance,” according to Farouk Soussa, an economist at Goldman Sachs Group Inc. It also “exposes the medium-term fiscal outlook to potential pro-cyclicality,” he said in a report. 

The revived connection with oil could become a major source of vulnerability for the budget if weaker demand and concerns about a slowdown in global growth become too powerful a drag on prices. Oil’s down around 10% this week, with Brent back below $86, despite the cuts by Saudi Arabia and others by Russia.

What Bloomberg Economics Says…

“Saudi Arabia needs oil at near $100 per barrel to avoid a budget deficit. It’ll try to boost crude prices by restricting production, both individually and collectively as the leader of OPEC+. That’ll be bad for the global economy, which is already facing rising recession risks.”

– Ziad Daoud, chief emerging markets economist. For more click here.

The latest approach appears to mark a departure from plans to decouple from crude so much that Saudi Arabia doesn’t “even look at the oil price,” in the words of Finance Minister Mohammed Al-Jadaan just over six months ago. Energy still provides the bulk of government revenue and largely dictates the performance of the economy.

Authorities were previously trying to break the link with crude by keeping spending in check and using energy proceeds to accelerate projects that diversify the economy. On average, Saudi Arabia’s breakeven oil price was near $81 in 2020-2022 and slightly lower in the prior two decades, according to the International Monetary Fund.

If outlays by the Saudi sovereign wealth fund are included, the breakeven will likely rise to $110 in the second half of this year, Bloomberg Economics estimates. The government had sought to shift a bigger share of capital expenditure outside the budget and make direct fiscal spending more immune to fluctuations in energy markets.

Under the latest projections, the Finance Ministry expects the kingdom to run a fiscal deficit in 2024 of 79 billion riyals ($21 billion), equal to about 1.9% of economic output. This year’s shortfall is projected at about 2% of GDP.

Though Saudi Arabia doesn’t disclose the price of oil built into its fiscal plans, Goldman Sachs estimates Saudi Arabia’s “working oil price assumption” is likely in the mid-$80s.

It’s unclear how the kingdom’s fiscal plans might change if it doesn’t get its way in the energy market. During an oil-price rout in 2020, authorities tripled the country’s value-added tax and cut a cost-of-living allowance for government workers.

Moody’s forecasts oil will average $80-$85 per barrel in 2023-2024 and gradually decline toward $50-$70 over the next few years, an outlook that assumes crude production will gradually increase.

“We assume that the government would rationalize spending if oil prices and production no longer supported higher capital expenditure,” Moody’s analysts said.

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