Saudi Arabia (and Russia for the moment) would be enjoying the hikes in world oil prices due to the deepening crisis between Israel, Lebanon, and the Palestinians. However, this joy will be temporary because forecasts released this week reveal rising pressures on spending and a worsening budget position.
The most dramatic part of the update was the slashing of growth forecasts and an increase in the projected budget deficits over the next three years. Saudi Arabia is now facing a period of higher spending and lower projected oil revenues.
The weak pre-budget update makes it easier to understand the news leak last weekend that indicated the country was prepared to protect market share by cutting prices and increasing production if necessary.
The Saudis and the rest of the OPEC+ group (mainly Russia) will have to decide whether the postponed easing of the cap on production, scheduled to start on Tuesday, will come into force on December 1.
The Saudis are apparently upset about the level of “cheating” by smaller producers such as Iraq and Russia. The weakness in oil prices over the past few months has pressured the Saudi budget, and this week’s revamped forecasts are a result of that.
Real gross domestic product (GDP) is now expected to grow by just 0.8% this year, down sharply from the previous estimate of 4.4%, according to the latest pre-budget report published by the Ministry of Finance on Monday. The GDP growth projection for 2025 has also been cut from a previous estimate of 5.7% to 4.6%, while the outlook for 2026 has been trimmed from 5.1% to 3.5%.
Economists say these future estimates are unrealistic, given the weak global outlook and the dependency on higher oil prices. While the economy has contracted for the last four consecutive quarters, non-oil economic activity grew by 4.4% in the second quarter year-on-year, up from 3.4% in the previous quarter.
However, oil (along with gas and chemicals) remains the cornerstone of the Saudi economy, and the belief in continuing price weakness and lackluster demand (along with the encroaching impact of renewables) is why the country is projecting ongoing budget deficits.
The Finance Ministry has projected a wider budget shortfall of about 2.9% of GDP for 2024, compared to a previous projection of 1.9% for the year. It predicted deficits of 2.3% and 2.9% in 2025 and 2026, both wider than previous estimates.
“The FY2025 budget highlights the Kingdom’s commitment to accelerate regulatory and structural reforms, as well as the development of policies,” the pre-budget report stated, as reported by Reuters. “It also focuses on transformative spending to promote sustainable economic growth, improve social development, and enhance quality of life.”
Saudi authorities also expect that the budget will remain in deficit for the next several years as the kingdom prioritizes spending to achieve the targets of its Vision 2030 plan to diversify the heavily oil-dependent economy.
The IMF’s latest forecast, released in April, put the fiscal breakeven figure at $96.20 per barrel for 2024, marking a roughly 19% increase from the previous year. This figure is also about 30% higher than the current price of a barrel of Brent, which was trading at around $74 as of Tuesday afternoon.