(Bloomberg) — Saudi Arabia boosted its revenue forecast for next year, with higher oil prices and production volumes poised to deliver the first budget surplus in eight years and the fastest economic growth since 2011.
It’s a sharp turnaround after energy market turmoil and the pandemic combined to crater the kingdom’s nascent economic recovery from the last oil price rout. But it also underscored that despite years of efforts by Crown Prince Mohammed bin Salman to diversify the Group of 20 economy — including progress in new sectors like entertainment — the fortunes of the world’s largest crude producer still rise and fall with the price of oil.
Saudi Arabia Sees Four Revenue Scenarios Amid Oil Uncertainty
To help mitigate that volatility, the kingdom is pushing ahead with plans to spend less. Excess government revenue will be “used as a buffer for the future,” Finance Minister Mohammed Al-Jadaan said.
“We won’t use it in the budget like used to happen,” he told reporters on Sunday. The excess revenue will first be transferred to the government reserves held by the central bank, and then allocated to the National Development Fund or the Public Investment Fund, two state controlled investment vehicles, he added.
Revenue next year is set to reach more than 1 trillion riyals ($267 billion), up from 903 billion riyals in a forecast published in September. The kingdom expects to record a surplus of 90 billion riyals next year, putting it 12 months ahead of a plan to balance the budget by 2023.
Expenditure Ceiling
By setting out a ceiling for spending that’s not tied to oil income, the Finance Ministry hopes it can minimize the boom-and-bust cycles that typified its economy in the past when the government would dramatically overspend while crude prices were high, and then cut back severely as they fell.
“We really want to make sure we totally decouple our expenditure from market volatility as that is very important for our economy and the people of Saudi Arabia,” Al Jadaan said. “The last thing you want is to continue this behavior of your oil revenue increases so you spend more or reduce taxes. What we need now is to build our buffers and make sure they are able to support our plans for Vision 2030,” he said, referring to the crown prince’s plan to diversify the economy away from oil.
In an effort to boost revenue to mitigate the impact of last year’s crash, the government unexpectedly tripled value added tax to 15%. That move boosted non-oil revenue yet put pressure on some low-income households and businesses. Expectations of a cut in the tax rate had been raised by Prince Mohammed, who had said the hike would last up to five years.
Growth Rebound
Officials expect a sharp rebound in the Saudi economy, with growth forecast at 2.9% this year and 7.4% in 2022, according to the statement.
But the emergence of the omicron coronavirus variant could spell trouble next year, putting economic recoveries globally in question. After the variant was first identified in late November, oil plunged into a bear market, with benchmark prices dropping around $10 in a single day — though there’s little sign yet of a major impact on demand.
Oil revenues in 2022 are forecast to reach 655 billion riyals, according to Mazen Al-Sudairi, head of research at Al Rajhi Capital. “The budget breakeven is around $65 a barrel while 2022 revenue is likely based on Brent at around $75 a barrel,” he said.
The International Monetary Fund estimated in October that Saudi Arabia needs an oil price of $72.40 a barrel to balance its budget next year. Brent crude prices have climbed this year to top $75 a barrel. Saudi production is also expected to reach an average of 10.7 million barrels a day in 2022, according to the International Energy Agency, the highest ever annual average.
The government doesn’t comment on the assumed oil price it uses in the budget, although Al Jadaan said it is “significantly more conservative than what some market participants would calculate.”
Saudi Arabia Eyes Green Bond in 2022 as Sustainable Debt Soars
Even with an expected surplus next year the government still plans to tap debt markets for about 40 billion riyals, mostly to refinance debt. It will also issue its first so-called green bond, with proceeds earmarked to fund projects related to the kingdom’s drive to reach net-zero emissions by 2060.
Government debt, which reached 32.5% of economic output in 2020 as a result of the pandemic, would start to fall in 2023, according the government forecasts.
(Writesthrough with context, adds links)
More stories like this are available on bloomberg.com
©2021 Bloomberg L.P.
