Riyadh, Saudi Arabia.
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Saudi Arabia cut its growth forecast and raised its budget deficit estimate for fiscal years 2024 to 2026, expecting a period of higher spending and lower projected oil revenues.
Real gross domestic product will now grow 0.8% this year, a dramatic drop from the previous estimate of 4.4%, according to the latest pre-budget report published by the Ministry of Finance on Monday. The GDP growth projection for 2025 has also been cut from the previous estimate of 5.7% to 4.6%; while the outlook for 2026 has been trimmed from 5.1% to 3.5%.
“The FY2025 budget highlights the Kingdom’s commitment to accelerate regulatory and structural reforms, as well as policy development,” the pre-budget report read. “It also focuses on transformative spending to promote sustainable economic growth, promote social development, and improve quality of life.”
The latest report further emphasizes the Saudi government’s plan to deploy sovereign and development funds “for capital investment while strengthening the private and non-profit sectors to promote growth and prosperity.”
Saudi authorities also expect the budget to remain in deficit for years to come, as the kingdom prioritizes spending to meet the goals of its Vision 2030 plan to modernize and diversify the oil-dependent Saudi economy.
The Ministry of Finance projected a wider budget deficit of around 2.9% of GDP for 2024, compared to the previous projection of 1.9% for the year. Deficit forecasts of 2.3% and 2.9% in 2025 and 2026, respectively, are also higher than previous estimates.
Saudi Arabia’s fiscal breakeven oil price – what a barrel of crude oil needs to balance the government’s budget – has increased significantly in the past month and year and is likely to rise even higher along with the increase in spending.
The IMF’s latest forecast released in April puts the fiscal breakeven figure at $96.20 for 2024, marking an increase of about 19% over the previous year. The figure is also about 36% higher than the current price of a barrel of Brent oil, which was trading at around $70.70 on Tuesday evening.
Oil prices are expected to remain low for at least the medium term amid sluggish demand and increased global supply.
Saudi Arabia hosts major international events that require expensive spending – like the 2034 World Cup and Expo 2030 – as well as building multi-trillion dollar megaprojects like Neom, which is supported by the kingdom’s huge wealth fund, the Public Investment Fund. .
“Saudi Arabia’s GDP dances to the rhythm of oil, and with the latest data from the Ministry of Finance, it is clear that oil gushes, so does the economy,” said Tarik Solomon, chairman emeritus of the American Chamber of Commerce in Saudi Arabia. CNBC. “But when the well slows down, so does the growth.”
Saudi Arabia’s public debt has grown from about 3% of GDP in 2010 to about 28% today, according to the International Monetary Fund — a big jump, but still small by international standards. Public debt in the countries of the European Union, for example, averages 82%. In the US in 2023, that number will be 123%.
Relatively low debt levels and high credit ratings make it easy for Saudi Arabia to take on more debt as needed. The Kingdom has also rolled out a series of reforms to boost and de-risk foreign investment and diversify revenue streams. While the country’s economy has contracted for the last four consecutive quarters, non-oil economic activity grew 4.4% in the second quarter of the year, up from 3.4% in the previous quarter.
