Saudi Arabia Lowers Growth Projections, Anticipates Wider Budget Deficits Amidst Diversification Push

Saudi Arabia has adjusted its economic forecasts, lowering its growth projections and anticipating larger budget deficits over the next three years. These revisions reflect the impact of lower projected oil revenues and the kingdom’s commitment to significant government spending aimed at diversifying its economy away from its heavy reliance on oil.

The latest pre-budget report, released by the Ministry of Finance, reveals a substantial reduction in real GDP growth forecasts. The kingdom now expects growth of 0.8% in 2024, a significant downgrade from the previous estimate of 4.4%. Growth projections for 2025 and 2026 have also been revised downward to 4.6% and 3.5%, respectively, from 5.7% and 5.1%.

Despite the lowered growth projections, the Saudi government remains committed to its ambitious Vision 2030 plan, which aims to modernize the economy and reduce its dependence on oil. This plan entails significant investments in various sectors, including infrastructure, technology, tourism, and renewable energy.

The government plans to leverage sovereign and development funds to finance these investments, while also encouraging private sector participation. These efforts are aimed at promoting sustainable economic growth, improving social development, and enhancing the quality of life for Saudi citizens.

However, this ambitious agenda comes with a price tag. The Finance Ministry now projects a budget deficit of 2.9% of GDP for 2024, wider than the previous estimate of 1.9%. Deficits are also expected to persist in 2025 (2.3%) and 2026 (2.9%), exceeding earlier projections.

A key factor contributing to the wider budget deficits is the anticipated decline in oil revenue. Saudi Arabia’s fiscal breakeven oil price, the price needed to balance the government budget, has increased significantly in recent years, reaching an estimated $96.20 per barrel for 2024. This figure is well above the current price of Brent crude, which is trading around $70 per barrel, and oil prices are expected to remain subdued in the medium term due to slowing global demand and increased supply.

While the wider budget deficits pose a fiscal challenge, Saudi Arabia benefits from relatively low public debt levels, currently around 28% of GDP, and a high credit rating. This provides the kingdom with some flexibility to take on additional debt to finance its diversification efforts. Moreover, recent reforms designed to attract foreign investment and develop non-oil sectors are showing positive results, with non-oil economic activity demonstrating strong growth in the second quarter.

Key Takeaways:

• Saudi Arabia has revised its economic growth forecasts downward and expects wider budget deficits in the coming years.
• These changes reflect lower oil revenue projections and increased spending on economic diversification initiatives.
• The kingdom’s fiscal breakeven oil price has risen substantially, exceeding current oil prices, posing a fiscal challenge.
• Despite these challenges, Saudi Arabia benefits from relatively low public debt levels and promising growth in non-oil sectors.

Saudi Arabia’s economic outlook is characterized by a combination of ambition and uncertainty. The government’s commitment to Vision 2030 and its ambitious spending plans could drive significant economic transformation. However, the reliance on oil revenue and the volatile global economic landscape pose ongoing challenges to the kingdom’s fiscal sustainability and long-term growth prospects.