Saudi Arabia to Cut Spending as Private Sector Growth Picks Up
Saudi Arabia to Cut Spending as Private Sector Growth Picks Up
(Bloomberg) -- Saudi Arabia plans to gradually reduce government spending as private-sector growth picks up and businesses take the lead, Finance Minister Mohammed Al-Jadaan said on Thursday.
Spending is expected to fall from about 1.05 trillion riyals ($280 billion) this year to 1.02 trillion riyals in 2020, then to 955 billion riyals by 2022, according to a pre-budget statement issued by the Finance Ministry on Thursday.
That won’t mean an early fall in the deficit, with the government of the biggest Arab economy expecting the shortfall to rise to 6.5% of gross domestic product next year, compared to 4.7% in 2019. That’s slightly above a 4.2% forecast but well below a median estimate in a Bloomberg survey of economists for a shortfall of 7.1%.
The decline in spending comes as Crown Prince Mohammed bin Salman’s overhaul of the oil-dependent economy shows signs of progress, Al-Jadaan told reporters in Riyadh.
“We believe at one stage you will need to start plateauing and then reducing your government spend as the economy picks up,” he said. “Some of the spend that we would have otherwise made next year and the year after is now being made by the private sector.”
The government started providing a preliminary budget outlook for the first time last year as part of an effort to make its public accounts more transparent, and kept the figures largely unchanged in its final fiscal program. Other key figures released on Thursday include:
- 2020 revenue seen at 833 billion riyals versus an estimated 917 billion riyals in 2019
- 2019 budget deficit seen at 131 billion riyals, rising to 187 billion riyals in 2020 before falling to 92 billion riyals in 2022
- Economic growth is estimated at 2.3% in 2020 compared with 0.9% this year
- Officials have revised down GDP growth for this year from 2.6%
- Public debt next year seen at 754 billion riyals versus 678 billion riyals in 2019
- A breakdown of oil and non-oil revenue should be provided in the final budget announcement in December, Al-Jadaan said
- The government expects deflation of 1% this year, with 2% inflation in 2020
Saudi Arabia has tried to keep the fiscal taps open without blowing a bigger hole in the budget as it steers the economy from its near-total dependence on crude. Despite the acceleration in non-oil growth this year to the fastest since 2015, output curbs negotiated by OPEC are increasingly a drag. The attack on Saudi oil infrastructure last month also put the spotlight on risks ahead.
“The deficit estimate for 2019 still looks optimistic, based on our oil price estimate,” said Monica Malik, chief economist for Abu Dhabi Commercial Bank.
“The key message is one of fiscal prudence while spending is still remaining quite high,” she added. “I think it would have been difficult for Saudi to announce a very expansionary budget with the oil price at the current level.”
Still, the kingdom has started to make some headway. It’s the only OPEC producer in the Gulf to cut its break-even oil price both this year and next, according to the International Monetary Fund. Saudi Arabia’s goal is to run a balanced budget in 2023.
“There are numerous fiscal reforms that happened during the past two or three years that have led to positive results in disciplining public finances,” Al-Jadaan said, adding that in 2020 and beyond, he expects the kingdom to “start reaping the benefits of the policies” that have been implemented so far.
| IMF Breakeven Oil Prices in $/bbl |
|---|
| Country | 2018 | 2019 | 2020 |
| Iran | 82 | 155.6 | 194.6 |
| Iraq | 45.4 | 62.5 | 60.3 |
| Kuwait | 54.2 | 54.3 | 54.7 |
| Saudi Arabia | 88.6 | 86.5 | 83.6 |
| United Arab Emirates | 66.7 | 70.2 | 70 |
Bloomberg Economics expects this year’s shortfall at 7.1% of GDP, while Fitch forecasts it will widen to 6.7% as a result of lower average oil prices and output.
| What Our Economists Say... |
|---|
| “Public spending has been Saudi Arabia’s main instrument for supporting the economy. It will be interesting to see how long they can sustain that fiscal stimulus in a bearish environment for oil prices.” -- Ziad Daoud |
Meanwhile, the prospects for the economy are deteriorating. The IMF just slashed its forecast for Saudi GDP growth this year to near zero from 1.9%, according to its World Economic Outlook.
“While non-oil growth is expected to strengthen in 2019 on higher government spending and confidence, oil GDP in Saudi Arabia is projected to decline against the backdrop of the extension of the OPEC+ agreement and a generally weak global oil market,” the IMF said.
Al-Jadaan was upbeat, however, citing progress on reforms that are bearing fruit.
Energy subsidy cuts will continue as planned, the minister said. “There is no change, we have a time frame for certain energy price reform and within that time frame, we are adjusting as the economy requires,” he said. “But the plan continues, and as you have seen we have implemented some of that already this year.”
Asked whether proceeds from the planned initial public offering of state oil giant Saudi Aramco will be included in the budget, he said they would not go to the treasury but rather to the Public Investment Fund to invest.
“One of the key reasons why we plan to IPO Aramco is actually to diversify and that means you will use the proceeds” of the stake sale to invest in other sectors, he said.
--With assistance from Donna Abu-Nasr.
To contact the reporters on this story: Abeer Abu Omar in Dubai at aabuomar@bloomberg.net;Vivian Nereim in Riyadh at vnereim@bloomberg.net
To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Mark Williams
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