Saudi Arabia Sees Budget Deficit Soaring in 2020

[Blackeyes90]

Skyscrapers stand in the King Abdullah Financial District beyond an empty parking lot in Riyadh, on July 28.

Saudi officials expect the kingdom’s budget deficit to widen to 12% of gross domestic product in 2020 and plan to cut spending by 7% next year as oil market turmoil pressures state finances, according to preliminary figures released on Wednesday.

A pre-budget statement published on the Finance Ministry’s website shows next year’s spending projected at 990 billion riyals ($264 billion), down from the 1.07 trillion riyals expected this year. That means that despite the extra costs of the coronavirus pandemic and a private sector stimulus program, officials plan to minimally overspend their original 2020 target of 1.02 trillion riyals, set last December.

The budget deficit is expected to narrow to 5.1% of economic output next year and 3% in 2022, according to the statement. The figures were released without the press conference that’s accompanied them in recent years.

“The outlook is better than what was anticipated during the first half,” the ministry said in the statement. In 2021, “the government seeks to preserve the fiscal and economic gains achieved in recent years and to achieve the goals of stability, fiscal discipline and spending efficiency.”

Officials say they’ll rely on extra borrowing to cover the deficit, expanded by the double crisis of energy market turmoil and the global coronavirus pandemic. Since the kingdom’s oil price war with Russia earlier this year, lower prices and output cuts negotiated by OPEC and its allies have cut into state revenue, restricting options to stimulate the biggest Arab economy just as it came under pressure from Covid-19.

While officials rolled out a series of stimulus programs -- including an initiative that helped cover the salaries of Saudi employees in the private sector -- they also introduced austerity measures, tripling value-added tax and raising customs fees.

“Total debt has surged to over 30% of GDP this year, and the government wants to keep this at around that level, so they need to keep the deficit under control over the next few years,” said Mazen Al-Sudairi, head of research at Riyadh-based Al Rajhi Capital. “Economic stimulus will need to come from other projects,” he added, such as mega-projects overseen by the sovereign wealth fund, which has its own funding.

Al Rajhi Capital expects this year’s oil revenue to be around 350 billion riyals, assuming production of 9.2 million barrels per day at $40 a barrel.
The deficit is projected to fall to 0.4% in 2023, the year by which officials have long said they intend to balance the budget, according to the statement.
“Reaching the 2023 deficit target looks challenging, including with the oil price uncertainties,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Other key figures from the statement include:

• Spending will decline each year from 2021 through 2023, when it’s expected to reach 941 billion riyals.
• Revenue is expected to rise to 846 billion riyals in 2021, from 770 billion riyals in 2020.
• Officials expect the kingdom’s economy to shrink 3.8% this year -- significantly more optimistic than a 6.8% contraction forecast by the International Monetary Fund -- followed by 3.2% growth in 2021.
• Public debt is projected to reach 941 billion riyals in 2021, or 32.9% of economic output, and just over one trillion riyals in 2023.

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[Ryder]

This is also going to take a hit on their diversification reforms and cutting dependancy from oil.