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.
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.
What Bloomberg Economics Says…
“A surplus next year confirms our estimate that Saudi Arabia needs crude to be around the mid-$70 a barrel level to balance its budget. But the budget is only one arm of government policy. The increasingly important role the PIF plays highlights the importance of consolidating the assets and liabilities of the central government, the PIF, the central bank and possibly Saudi Aramco in a single balance sheet.”
–Ziad Daoud, chief emerging-markets economist. For more analysis, click here.
“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. Even with an expected surplus next year the government still plans to tap debt markets for about 40 billion riyals, mostly to refinance debt.
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.
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.”