Riyadh looks to bond markets to manage fiscal shortfall

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Hind Al Soulia - Riyadh - Next year’s budget shortfall will mark the seventh consecutive year that Saudi Arabia recorded a deficit since the collapse in oil prices in 2014.

Meeting challenges. Participants attend the Saudi budget Forum in Riyadh, December 10. (AFP)

Saudi Arabia is ringing out the year having recorded the world’s largest initial public offering and convinced fellow oil producers to rein in crude output in support of higher oil prices.

Riyadh’s 2020 state budget doesn’t suggest much joy for the coming year, though, with an anaemic global economic picture prompting Saudi Arabia to trim government spending and expect lower revenues.

However, it’s not all doom and gloom for the largest Gulf Arab economy: its fledgling private sector is making gains and Saudi GDP growth is expected to rise after a flat performance in 2019.

In the budget released December 9, the Saudi government forecast state expenditures of 1.02 trillion riyals ($272 billion) for 2020, a 2.6% dip from this year’s spending.

The budget estimates total revenues at $222 billion, a 9% fall from 2019 earnings. The government anticipates the budget deficit to be approximately $50 billion in 2020, up from $35 billion. Next year’s budget shortfall will mark the seventh consecutive year that Saudi Arabia recorded a deficit since the collapse in oil prices in 2014.

The Saudi Finance Ministry alluded to the effects that the global economy is having on the country, stating: “The FY2020 budget is prepared in the context of challenging global economic and international market conditions. Trade disputes continue to cast a negative shadow over the global economic outlook, through negative effects on international trade, investment flows and stability of international markets.”

Riyadh boosted spending in its 2019 budget to jump-start a soft economy amid hopes that increased expenditures would spur growth in the private sector. Stimulating private-sector growth has been a focus of Saudi Vision 2030, the government’s economic transformation programme designed to shift Saudi Arabia from its high dependence on oil revenues.

Despite projecting a 2.6% growth in GDP in its 2019 budget, the Saudi economy expanded only 0.4% this year, constrained by lower oil production and stagnant oil prices. The government estimated that non-oil sector gains will push GDP growth to 2.3% in 2020.

Despite efforts by the Saudi-led coalition of OPEC and independent producers known as OPEC+ to maintain production cuts of 1.2 million barrels per day (bpd), poor compliance by some producers, a global oil glut and weakening economic demand kept a lid on oil prices during 2019.

Riyadh, which has taken on the largest percentage of the production cuts, helped convince OPEC+ to further slash collective output by 500,000 bpd through March to try to propel prices.

Saudi Arabia’s projected oil income for 2020 is $136.8 billion, a nearly 15% slide from estimated oil revenues in 2019 of $160.5 billion. Non-oil revenue is predicted to increase next year to $85.3 billion, up 1.5% from this year.

The Saudi government will maintain spending on public wages at $134.4 billion next year, though it has signed off on a 22% decrease in subsidies funding to $4.5 billion for 2020. It plans to reduce social benefits expenditures from 2019 levels of $20.5 billion to $18.4 billion.

However, Riyadh has continued the Citizens Allowance programme it initiated in early 2018 that provides monthly cost-of-living payments to lower- and middle-income families, offsetting the economic sting felt from energy-related subsidy cuts and tax levies. Those allowances reportedly cost the government upward of $13 billion annually.

Interestingly, Riyadh did shave 8% off its projected military spending for 2020 from 2019 levels, allocating $48.5 billion for that sector. Official spending does not reflect off-budget military items and there is scepticism that Saudi Arabia would truly rein in its defence expenditures when relations remain volatile with Iran, particularly after the September bombings of Saudi infrastructure that Riyadh has said was carried out by Tehran.

Saudi Finance Minister Mohammed al-Jadaan credited progress in the kingdom’s nascent private sector in part for the government’s decision to reduce its 2020 expenditures, saying: “We have seen the effort of enabling the private sector to do some of the projects that we would have otherwise done, which yielded a reduction of about 50 billion Saudi riyals ($13.3 billion) from our expenditure this year. That is going to continue next year.”

While encouraged by the uptick in private sector activity, Riyadh is looking at tapping into proceeds from the initial public offering of Saudi Aramco that generated $25.6 billion to stimulate economic growth in the country’s private industry. Jadaan indicated that the Saudi Public Investment Fund would probably allocate “a lot” of the Saudi Aramco sale proceeds to local investments.

Faced with a budget deficit next year that is expected to reach 6.4% of GDP — a rise from an anticipated 4.7% in 2019 — Riyadh will turn to international and domestic bond markets to manage its fiscal shortfall. Since tapping into international bond markets in 2016, Riyadh has reportedly raised as much as $60 billion in international bond issues.

Jareer Elass is a Washington-based energy analyst, with 25 years of industry experience and a particular focus on the Arabian Gulf producers and OPEC.

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