2022 budget returns Saudi Arabia to surplus for first time in eight years

Saudi Arabia expects to post its first surplus in about a decade next year, with the Arab world's largest economy forecast to expand 7.4 per cent.

Next year's growth will be driven by an increase in oil revenue, a projected improvement in the kingdom's non-oil gross domestic product, a continued economic recovery from the Covid-19 pandemic and the enactment of initiatives and programmes that are intended to diversify the economy, Saudi Finance Minister Mohammed Al Jadaan said on Sunday.

Riyadh expects a fiscal deficit of 2.7 per cent of gross domestic product this year. The economy is set to grow 2.9 per cent in 2021, driven by driven by a rise in non-oil GDP, which is forecast to expand 4.8 per cent.

The economic growth projections are above the estimates of the International Monetary Fund, which has attributed the rebound in output to the country's swift and effective response to the coronavirus pandemic and the expansion in the kingdom's non-oil sector. The IMF expects GDP to grow 2.8 per cent this year in the kingdom after the economy contracted 4.1 per cent last year.

The kingdom forecasts a surplus of 90 billion riyals ($23.99bn), or 2.5 per cent of GDP, next year and the government plans to contain public spending despite a surge in oil prices that helped to boost state coffers. This is the first surplus since 2013.

Oil prices have rebounded over the past year, touching a three-year high as a result of a faster-than-expected economic recovery in the world's largest developed economies.

Brent, the international benchmark under which two thirds of the world's oil is traded, has rallied about 47 per cent this year and was trading at $76.04 at 7.56am UAE time on Monday. West Texas Intermediate, the gauge that tracks US crude, has increased about 50 per cent this year and is trading at $72.59.

Total revenue for 2022 is estimated at about 1.05 trillion riyals, up 12.4 per cent from the previous year, with spending at 955bn riyals, the lowest since 2017, and an expenditure cut of about 6 per cent year on year.

The world's biggest oil exporter's revenue jumped by about 10 per cent this year to 930bn riyals, from 849bn riyals in 2020, driven by higher crude prices and oil production rises as global energy demand recovered.

The kingdom does not disclose the oil price under which it bases its budget on. However, Saudi asset management and advisory company Jadwa Investment estimates a Brent oil price of around $70-75 per barrel represents "a reasonable range" for the budgeted oil price in the 2022 baseline revenue scenario, according to a research note on Monday. Emirates NBD said it estimates the budget break-even oil price for the kingdom will fall to $65 in 2022 from an estimated $73 in 2021.

Surpluses will be used to boost government reserves, as well as support national development funds and the kingdom's sovereign wealth fund, the Public Investment Fund (PIF), Mr Al Jadaan said.

Surpluses might be channelled to hasten efforts to put into effect some strategic programmes and projects with economic and social dimensions, or to partially repay the public debt based on market conditions, he said.

Next year's budget reflects the "government's determination to promote post-pandemic economic growth, and to allocate resources on health, education and the development of core services, in addition to the continuation of social support and benefits", Mr Al Jadaan said.

The structure of the budget is aligned with the kingdom's reform process to "develop the management of public finances while maintaining the previously announced spending ceilings in a manner that ensures fiscal sustainability in the medium term and a strong financial position that enables the state to respond to any emergency changes and absorb unexpected economic shocks", Mr Al Jadaan said.

The kingdom will continue to tap debt markets in 2022, amid a low interest rate environment, mainly to refinance maturing debt.

Public debt is forecast to decline to about 25.9 per cent of GDP in 2022, from 29.2 per cent in 2021, as a result of expectations of a budget surplus and GDP growth, Mr Al Jadaan said.

The kingdom's debt-to-GDP ratio is expected to remain steady and is projected to fall to 25.4 per cent by 2024, he said.

"The financial and economic results and indicators confirm that we are progressing positively," Crown Prince Mohammed bin Salman said after the budget's approval.

"Next year's budget comes amid a global climate characterised by great challenges in light of the repercussions of the pandemic, and great local ambitions, but in a financially disciplined framework that focuses on the efficiency and effectiveness of directing government spending and utilising available resources to achieve the best return from them, while maintaining financial stability as a fundamental pillar of sustainable growth.”

Business activity in the non-oil private sector of Saudi Arabia continued to improve in November, boosted by the easing of Covid-19 restrictions and a rise in tourism activity.

The kingdom's seasonally adjusted purchasing managers' index – a gauge designed to give a snapshot of operating conditions in the non-oil private sector economy – stood at 56.9 in November, in line with the average recorded over the 12-year series.

A reading above the neutral 50 level indicates expansion while a reading below points to a contraction.

Saudi Arabia is focused on diversifying the economy under its Vision 2030 programme that aims to cut its dependence on hydrocarbons and develop local industries and the kingdom’s manufacturing capabilities.

The PIF is a central plank of Riyadh’s efforts to nurture local industry, develop new non-oil sectors and create more jobs in the kingdom. In January, the sovereign wealth fund unveiled a five-year strategy under which it intends to double its assets to $1.07 trillion and invest a minimum of $40bn a year into the kingdom’s economy until 2025.