Complex Made Simple

Experts are saying math behind Saudi’s budget doesn’t add up

It really all boils down to oil.

If prices climb, then Saudi is ok with its deficit and expenditure projections in the recently announced state budget for 2019.

To prop up prices, OPEC+ agreed this month in Vienna to cut a combined 1.2 million barrels per day (bpd) for the first six months of 2019.

The budget calls for spending of 1.106 trillion riyals ($350 billion) for the year, up 7% from 2018.

Oil revenues account for more than 70% of the kingdom’s total export income.

King Abdullah Financial District in Riyadh, Saudi

Saudi projected oil revenues reaching 662 billion riyals ($178bn) in 2019.

But, if Brent disappoints, then many believe the scenario plays out differently than anticipated.

What do the experts say?

Related The Saudi 2019 budget explained: Are finances a picture of health?

Where oil needs to be

Saudi Arabia will require oil prices higher than $84 per barrel ($/b)to avoid running another deficit, said S&P Global Platts.

Analysts with Riyadh-based investment bank Al-Rajhi Capital said the budget implies a fiscal breakeven oil price of $84/b for 2019, which is $30/b higher than the level Brent futures are trading today.

State reserves managed by the Saudi central bank have climbed to $523 billion from less than $480 billion a few months ago, as reported by AFP, benefitting from a combination of international debt borrowing and higher oil prices in 2018, which in October crossed $85.

Saudi expects total government revenues to rise 9% to 975 billion riyals ($263.2bn) in the forthcoming fiscal year, according to the Ministry of Finance.

“To achieve its budgeted revenue figure, Riyadh still requires oil to trade at $70/b,” Al-Rajhi Capital estimated.

“Unless oil prices rebound significantly then the kingdom faces rising debt or the demands to drain its currency reserves. The budget has been in the red since the oil price crash in 2014, but the ministry said Tuesday it expects the deficit to shrink to zero by 2023,” S&P said.

The rise in revenues allowed Saudi Arabia to narrow its 2018 deficit to 138 billion riyals ($37bn), down from the ministry’s previous guidance in October of 148 billion riyals ($40bn).

Read Total revenue to rise 11%: Saudi reveals 2019 Preliminary Budget

What analysts say about these projections

Ziad Daoud, the Dubai-based chief Middle East economist at Bloomberg Economics says the Saudi budget plan defies “the laws of arithmetic”.

“It projects a 9% increase in revenue against the backdrop of lower oil prices and production cuts by OPEC members,” Daoud says.

The budget extended for another year extra benefit payments for government employees estimated to cost the Kingdom more than $13 billion annually.

“Withdrawing subsidies is unlikely to plug that gap. This leaves the government with a choice — either lower spending and accept slower economic growth or miss its deficit target. We expect it to opt for the latter,” Daoud adds.

Jason Tuvey, the London-based senior emerging market economist at Capital Economics said:

“… the government seems to be relying on optimistic assumptions for oil prices to rise to almost $80 per barrel,” he wrote in a report.

Image by: MarketsInsider

Tuvey expects a budget deficit close to 10% of Saudi GDP, which at $833 billion in 2018, puts the projected deficit at $83.3bn, more than double the projected $35 billion or 4.2% of GDP in 2019.

“A wider-than-expected deficit would not cause too many problems,” Tuvey adds meaning government finances its deficit it either through drawing down reserves or issuing more debt.

Mohamed Abu Basha, the head of macro analysis at Cairo-based EFG-Hermes investment bank said that as the kingdom plans a 20% increase in capital spending, he foresees “challenges” of realizing “such ambitious investment spending”.

Tim Ash, a London-based strategist at BlueBay Asset Management LLC said: “Debt issuance will depend on where oil prices go. Lower oil prices will mean more issuance. That said, their strategy is to issue more debt locally, and cut external issuance.”

An indirect source of revenues was announced by Saudi Arabia’s finance minister Mohammed al-Jadaan who made the comment in an interview with Reuters saying cash settlements from a Saudi anti-corruption campaign in 2019 are predicted to be “not significantly less” than the $13.3 billion collected this year.

Read: Saudi Arabia’s $500bn Red Sea project NEOM on track

More bond issues

Bloomberg says Saudi intends to issue around 120 billion riyals ($32 billion) of bonds next year to help finance its deficit, with plans to tap international markets in the first half, quoting Al-Jadaan.

“The kingdom is considering international bonds in dollars and other currencies,” Al-Jadaan told Bloomberg TV in Riyadh on Wednesday.

“We now have access to a wider network of investors in the U.S., which is the primary market, but also in Europe and Asia,” Al-Jadaan said. “So we are expanding and we are likely to go to the international markets early next year.”

Saudi issued international bonds for the first time in 2016 as part of Crown Prince Mohammed bin Salman’s economic overhaul to prepare the kingdom for life after oil, according to Bloomberg.

Al-Jadaan added that the kingdom’s inclusion in MSCI’s emerging markets index next year will help it attract passive flows from institutions.

S&P Global Platts said that debt is expected to reach about 22% of GDP in 2019, quoting an estimate by the Saudi Ministry of Finance, which has imposed a 30% cap on public debt as a percentage of GDP to keep a grip on public finances.

The kingdom’s borrowing stood at 549.5 riyals ($146.5 billion) as of September 30, 2019.