Closing bell: Saudi main index rebounds to 10,640

RIYADH: Saudi Arabia’s plan to run a modest budget deficit of 2 percent of gross domestic product marks a “notable departure” from its previous fiscal trajectory, Fitch Ratings has declared.

According to the US-based agency, the Kingdom is placing “significant emphasis” on nurturing non-oil economic growth and advancing various key priorities outlined in the Vision 2030 strategic development plan.

Saudi Arabia’s 2024 pre-budget statement, published in September, underscored the importance of ongoing structural reforms and financial sustainability, including maintaining government reserves and managing public deficits.

“Characterized by annual surpluses and a declining government debt-to-GDP ratio,” the report said, “this shift in policy reflects a deliberate decision to leverage the Kingdom’s fiscal flexibility in support of robust non-oil economic expansion.”

Based on the pre-budget statement, Fitch Ratings estimates a budget decline of approximately 3 percent of GDP in 2023, assuming an annual oil price of $80 per barrel.

Should oil prices average $85/bbl, as the Kingdom suggests, the 2023 deficit would be closer to 2 percent of GDP. However, the pre-budget statement does not disclose its oil price assumptions.

Fitch anticipates a minor shortage in 2024 compared to the projections based on higher revenue forecasts. This forecast factors in an average oil price of $75/bbl and a slight increase in production.

The estimate also accounts for performance-related dividends from Aramco, which are not included in the statement. Consequently, Fitch expects the fiscal breakeven oil price in 2024 to hover around $80/bbl, subject to variations in oil production levels.

The report suggests that financing needs will be addressed through debt issuance rather than tapping into government deposits at the Saudi Central Bank.

The forecast indicates that this approach could push government debt to approximately 30 percent of GDP in 2026, up from nearly 27 percent in 2022.

Nevertheless, this ratio is expected to remain lower than the median for sovereigns in the “A” category, projected at around 55 percent in 2025.

Fitch Ratings cautions that the more procyclical fiscal policy outlined in the pre-budget statement could expose Saudi Arabia to greater risk in the event of a global economic shock leading to a drop in oil prices.

In such a scenario, the government may need to curtail spending, as it has done in the past, to mitigate the impact on public finances. This approach, while protecting fiscal stability, could exacerbate macroeconomic volatility.

There is also an increasing risk that higher spending levels become entrenched, particularly if oil prices remain elevated, which could complicate future adjustments to government expenditures.