Saudi Arabia’s budget will more than make up for a production cut announced by the kingdom with OPEC and its allies, according to the International Monetary Fund, as it reels in more revenue thanks to higher crude prices and keeps spending in check.
(Bloomberg) — Saudi Arabia’s budget will more than make up for a production cut announced by the kingdom with OPEC and its allies, according to the International Monetary Fund, as it reels in more revenue thanks to higher crude prices and keeps spending in check.
“The impact on the budget and on the external position relative to what we had projected is positive,” Amine Mati, the IMF mission chief to Saudi Arabia, said in an interview in Washington. “So the price impact would offset the loss that could arise from the production.”
Oil has rebounded after a banking crisis that rippled across markets drove futures to a 15-month low in mid-March. Global benchmark Brent has held above $85 per barrel in April, following the unexpected decision to cut more than 1 million barrels in daily output starting next month.
Saudi Arabia, OPEC’s de facto leader and the world’s top oil exporter, agreed to slash production by 500,000 barrels a day.
Saudi oil revenues last year reached nearly $326 billion, a near-record windfall that combined with higher production volumes to make its economy the fastest growing in the Group of 20. It also helped the government run a fiscal surplus for the first time in nearly a decade.
The IMF anticipates Saudi economic growth will slow to 3.1% this year and next — from almost 9% in 2022 — after sharply improving the outlook for 2023 in one of the fund’s biggest positive revisions in its latest global forecasts.
What Bloomberg Economics Says…
“The OPEC+ decision signals that Saudi Arabia sees $80 a barrel as a preferred floor for oil prices. Higher public spending — partially to offset rising interest rates — will trigger action when oil slumps.”
—Ziad Daoud, chief emerging markets economist. For more click here
While Saudi Arabia’s economic growth rate may suffer from lower crude production, the cuts won’t affect its non-oil expansion “because that’s going to be driven by domestic demand,” the IMF’s Mati said.
“At least in the short term, we don’t see a disruption in the spending pattern at the central government budget,” he said. “And on the economy as a whole, we see some of the investment in the private sector driving the growth.”
The IMF’s optimism is at odds with the views of the likes of Goldman Sachs Group Inc., which has argued that the Saudi fiscal outlook is weakening and now forecasts a deficit of 1.2% of gross domestic product this year, down from a shortfall of 0.2% seen previously.
Goldman has said that it sees “at best, a modest benefit to the budget” of Saudi Arabia after an implied reduction in fiscal revenues of about 5% this year, with Brent forecast to be just 7% higher by end-2023.
Without the announced cut, Goldman estimated Saudi Arabia needed oil to average $76 to balance its budget in the current fiscal year. The IMF has taken a more upbeat view and previously put the Saudi fiscal break-even oil price at $66.8, down from $84.6 in 2021.
“Given that central government spending is now more contained and is expected to be reduced going forward,” the oil price Saudi Arabia requires to balance its books “is lower than what it used to be,” Mati said. “We expect that break-even price to become even lower.”
Saudi Arabia still depends heavily on the flow of petrodollars into the government’s coffers to power expenditure on job creation and costly infrastructure. It’s also shifted more capital outlays on economic development to the sovereign wealth fund, known as the PIF, as well as another state investment vehicle, and those figures don’t show up in the budget.
To meet all spending commitments that include such giga-projects as the $500 billion construction of the futuristic city of Neom and to maintain the stability of the social contract between the government and the citizens, Saudi Arabia needs an oil price above $80 and perhaps closer to $100, according to Bloomberg Economics.
‘Consolidated View’
Authorities are working to provide more transparency on the sovereign balance sheet as a whole, an effort that’s now become “part of their priorities” after being long encouraged by the IMF, Mati said.
“There’s a lot of operations happening in the central government, like the PIF, the central bank and other entities,” he said. “It’s important to have a consolidated view of the fiscal position and what’s happening.”
Saudi Arabia has tried to break the link with crude by holding back spending increases and using energy proceeds to accelerate projects that contribute to weaning the economy off a reliance on oil. Current plans call for keeping the budget in the black in the coming years after a slew of measures that included reductions in subsidies alongside more taxes and levies.
The government’s latest fiscal outlook, unveiled in December, showed it expected to run a surplus of 16 billion riyals ($4.3 billion) in 2023, nearly double its previous estimate.
“There’s now a delinking that we are seeing in terms of oil price and spending patterns,” Mati said. “Today there’s lot of fiscal discipline with higher oil prices.”
The IMF is also confident that Saudi Arabia won’t prove too vulnerable should oil prices decline again, since it’s in a better position to rely on non-oil revenue or compensate for any possible damage to the budget by reviewing some spending commitments, he said.
“The spending pattern today is sustainable and can also be financed,” Mati said. “You also have quite a lot of room on non-oil revenue that the government can undertake. They’re also thinking about reforms on the revenue strategy. So that could help offset some of the decrease in oil price.”
–With assistance from Abeer Abu Omar and Matthew Martin.
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