Saudi Arabia: Fiscal policy remains disciplined despite higher oil prices

Khatija Haque - Head of Research & Chief Economist
Published Date: 07 October 2021


Saudi Arabia's budget deficit narrowed sharply in Q2 21 to just -SAR 4.6bn (-USD 1.2 bn; -0.6% GDP) compared with -SAR 109bn in Q2 2020.  Oil revenues have recovered from the depth of the pandemic lows but non-oil revenues have provided a significant boost to the budget as higher VAT and customs duties combined with a sharp rebound in consumer spending led to a doubling of non-oil revenues in H1 21 compared with a year earlier. 

However, the government was also disciplined on the spending side, despite higher than expected oil prices. Total expenditure was slightly lower y/y in H1 21, as capex spending fell by more than a third.  In the October preliminary budget statement for 2022, Saudi Arabia revised up its expenditure estimate for 2021 by 3%, while budget revenue was raised by 9%.  This yielded an official deficit projection of -2.7% of GDP in 2021.  We are more optimistic on revenue and anticipate a budget shortfall of -1.1% this year.

For 2022 and 2023, the government revised up its forecast for oil revenues next year and in 2023 by 4.5% and 4.3% respectively, but kept expenditure projections unchanged from the 2021 budget’s medium term forecasts.  This implies a cut to budget spending next year of almost -6%, with another -1.5% decline in 2023.  The official projections show the budget balance moving into surplus in 2023, and reaching 1.2% of GDP in 2024. 

In our view, the new revenue forecasts are still conservative, and we think the Saudi budget could move into surplus next year (around 0.3% GDP) even if expenditure is maintained at 2021 levels.   Nevertheless, the government is signalling its commitment to maintaining fiscal discipline even as oil prices are well above what was budgeted at the start of this year as there is a global shortage of energy as the northern hemisphere heads into winter.

Saudi Arabia budget projections

Source: Saudi Ministry of Finance, Emirates NBD Research

Non-oil economy grew 5.4% in H1 2021

The Saudi non-oil economy grew faster than we had expected in H1 21, notwithstanding a slight q/q contraction in the non-oil sectors in Q2.  Manufacturing; trade, restaurants and hotels; transport, storage and communication; and financial services all posted strong annual growth in Q2, underpinning non-oil sector growth of 8.4% y/y in Q2 21. PMI data for Q3 point to solid expansion in the private non-oil sectors in Q3, and we expect the non-oil GDP to grow by 5% on average in 2021, higher than the government’s 4.2% estimate.

The unemployment rate among Saudis declined to 11.3% in Q2 21, the lowest in a decade, although the labour force participation remains low at under 50%.  The growth in jobs in Q2 was in the public sector, as total employment in the private sector declined -2.9% q/q and -6.5% y/y. Non-Saudis accounted for -193k of the -238k jobs lost in the private sector last quarter.   

Oil sector to benefit from higher oil production

Saudi Arabia’s oil production grew by 12.6% q/q in Q3 21 according to Bloomberg estimates, reaching 9.69mb/d by the end of September.  We expect crude oil production to rise to around 10m b/d by the end of this year, in line with the OPEC+ agreement to gradually unwind the pandemic-related production cuts.  

For the year as a whole, we now expect only a modest -1% decline in oil and gas GDP, and we expect the oil and gas sector to contribute positively to headline GDP growth in 2022. 

Domestic demand continues to recover

Money supply growth has slowed since the start of the year, reaching 7.9% y/y in August from 9.8% in July, but private sector credit growth remains robust at 15.1% y/y.  Credit growth to public sector entities slowed to 21.4% y/y in August from a four-year high of 41.7% y/y in June. Consumer spending has rebounded in 2021, and is up 10.5% y/y in the year to August as travel restrictions likely led to greater spending domestically, especially over the summer. 

Headline inflation has declined sharply on base effects (last summer’s VAT and customs duty increases are now in the base), falling to 0.3% y/y in August from 6.2% y/y in June.  While food prices and transport costs have increased on a m/m basis over the last few months, these have been offset by lower housing costs.  We expect consumer inflation to average 3% in 2021, down from 3.4% in 2020.

Saudi Arabia inflation

Source: Haver Analytics, Emirates NBD Research

Deal-related boost to inward FDI in Q2 21

Saudi Arabia’s current account surplus widened sharply in Q2 to reach USD 12.0bn (6.1% GDP) up from 0.8% of GDP in Q1 largely on the back of higher export revenues.  In the financial account of the balance of payments, foreign direct investment into KSA jumped to USD 13.8bn in Q2 21, the highest level since at least 2010, largely due to the sale of a 49% stake in Aramco Oil Pipelines Company to a consortium of foreign investors for USD 12.4bn.  However, this was more than offset by the purchase of portfolio and other assets abroad by Saudi investors, resulting in a net outflow of funds on the financial account in Q2 21.