The Saudi government has published the 2025 pre-budget, a document produced before the adoption of the budget to provide the main fiscal guidelines in the short and medium term. It is a document which aims to improve the transparency of the budgetary exercise and process. The budget is, for its part, approved during the fourth quarter of the year, and can, obviously, deviate from the pre-budget, if circumstances and economic developments so require. The publication of the pre-budget is an opportunity to follow the government’s updating of the landing forecasts for the economy and the budget, three months before the end of the fiscal year. It is also rich in information, when compared to the 2024 budget, it highlights the changes in the projection of the economy and medium-term budgetary strategy. So what can we learn from the analysis of this document?
A less favorable 2024 landing
The government’s growth forecast for 2024 surprises on the downside. At 0.8%, it is certainly well below the 2024 budget forecast (4.4%), but it is also lower than the IMF forecast, in its very recent (September) annual review of the economy. Saudi Arabia under Article IV 2024 (1.7%).
It is, however, mainly to the oil sector that we owe this revision. Indeed, last month, several members of OPEC+, and Saudi Arabia at the forefront, announced the extension of their voluntary oil production cuts until the end of November. To the cuts announced in April 2023 of 1.65 million barrels/day (mbd) until the end of 2025, were added, in November 2023, additional voluntary cuts of 2.2 mbd. The latter were to be lifted gradually each month from October 2024, a date now pushed back by two months, to December 2024. Saudi Arabia’s production will therefore remain at 9 mbd on average in 2024, compared to 9.9 mbd in 2023. In the first half of 2024, this resulted in a recession in the oil sector of around 10%.
Non-oil growth, however, remains dynamic. The 2025 pre-budget even forecasts it slightly higher than the IMF projection: 3.7% compared to 3.5%. This is mainly driven by private consumption – notably stimulated by new entertainment and tourism offers – and investment – boosted by the acceleration of the implementation of Vision 2030, by the government and the sovereign fund. (the PIF).
As for the 2024 budget landing, it is marked by a deficit slippage of 1% of GDP compared to the budget. This essentially reflects additional investment expenditure, linked to the acceleration of the achievement of Vision 2030. Budgetary revenues increase by 2% in 2024 and are placed 5.5% above the level planned in the budget, despite a decline in oil revenues. The IMF estimates this decline at 12%, due to voluntary cuts. These were nevertheless partially offset by a new dividend on the performance of the oil company Aramco, for the equivalent of 2% of GDP.
In the medium term, growth revised downwards and a more expansive budget
The medium-term macroeconomic framework in the 2025 pre-budget exercise reveals a downward revision of the growth trajectory compared to the 2024 budget year. This results, in particular, from a marked change in the starting point (2024). Despite a much stronger catch-up in 2025, driven by more powerful positive base effects on oil production, the growth trajectory is now expected to be sustainably lower than what was projected last year.
This also reflects a revision in non-oil growth, which had averaged 5.7% over 2021 and 2022. It stood at 3.8% in 2023, and is expected to be at a stable level in 2024. This slowdown reflects a decline in the contribution of investment, which had reached an exceptional level of growth of 32% in 2022, linked to a still very procyclical use of oil revenues in the budgetary management of the kingdom. Despite everything, the momentum of the non-oil sector remains very dynamic. The IMF expects non-oil growth of around 4-4.5% over 2025-2029, which is based on a scenario of partial realization of the investment plan associated with Vision 2030. The government, in its response to the IMF, specifies that it is rather banking on non-oil growth of around 4-5% over the period, a fairly close projection, which surely demonstrates a degree of prudence in planning.
These scenarios remain very uncertain. Above all, the economy is still very dependent on the oil sector, whose developments are unpredictable, in a particularly unstable regional and global environment. Current growth scenarios are built around OPEC+ production announcements, which are subject to frequent revisions. Indeed, the factors of volatility in the global oil market are multiplying. First, the prospect of a structural weakening of Chinese growth potential is worrying, because it could fundamentally impact oil demand. Then, the context of regional conflict, the scope of which threatens to expand, increases uncertainty around the supply and price of oil, and in particular the risk premium attributed to it by the markets. Finally, the realization, or not, of these risks, raises the question of the response, in the short and medium term, of OPEC+ and the maintenance of its capacity to coordinate. Furthermore, the organization’s strategy could change, independently of these developments, by turning towards an objective of defending market shares, rather than prices. The prospects for non-oil growth also depend on all this, since the public investment component – and even private, when this includes investments by the PIF or public companies – is the main driver. It is the investment channel which therefore sets the limit for the decoupling of oil and non-oil growth, in a period of transition.
Regarding the budgetary strategy, the Ministry of Finance expresses a clear intention: to use budgetary space to achieve diversification objectives. Part of this space must be gained through consolidation efforts, the rest will result in higher deficits, financed by debt.
But at this stage, the consolidation effort is not based on the introduction of a new tax or on increasing the tax burden. The expected drop in oil prices1 will therefore constrain revenues, and medium-term budgetary projections indeed forecast a decline in revenues to 27% of GDP from 2025 to 2027, compared to 30% in 2023-2024. The budgetary effort then consists of a reallocation of current expenditure towards investment expenditure. This will involve controlling the efficiency of spending (particularly on the purchase of goods and services) and reducing the weight of public salaries on the budget.
In other words, the intention is therefore to favor investment in diversification to the detriment of other current expenditure and deficit targets. This diversification should then support the growth of non-oil revenues, without increasing the tax burden and therefore, combined with control of current expenditure, lead to a structural consolidation of the non-oil budget balance.
As with the growth trajectory, this strategy and budgetary planning is subject to significant uncertainties. Oil revenues, on which the budget still depends to the tune of 60-65%, must be sufficient to contain deficits while allowing the achievement of investment objectives. Furthermore, if the planned investments do not materialize, this will constrain non-oil growth. This in turn could then be insufficient to generate the expected growth in non-oil revenues and to create the private employment necessary to release wage pressures driven by the government.
Our opinion – Saudi Arabia, faced with its large-scale diversification plan, Vision 2030, is in a planning moment. This exercise is positive because it demonstrates the development of the strategic depth of economic policies, which increasingly integrate the challenges of the country’s medium-term trajectory. It is nevertheless a perilous exercise, because it comes up against the oil hazard and a long tradition of procyclical public policies. Already, the growth trajectory is revised downwards. This does not reflect a failure of reforms. On the contrary, they are welcomed by the rating agencies, notably S&P, which, in September, placed a outlook positive on its rating, highlighting the momentum and progress of the non-oil economy. It is rather the observation that deep economic movements are slow, and that if a very strong stimulation of public (and parapublic) investment can boost growth, it remains constrained by its potential which is built over the medium term. In the interim, the decoupling between the oil and non-oil economies remains limited.
The pre-budget is at least an opportunity to give a clear direction: the budget will be more expansive. And this is key to managing expectations. Because Saudi Arabia has comfortable fiscal space: government debt is low – and based on the current scenario – it is projected below 30% of GDP until 2027. The country can therefore afford a phase of budgetary expansion, without compromising the health of its public accounts, to the extent that this allows it to build its capacity to resist shocks. The difficulty will nevertheless be to ensure continuity of investment and reforms, despite the significant risks of volatility on the oil market. For the moment, the kingdom is not providing visibility on alternative measures and strategies, if its oil revenues are severely constrained. Will it be inclined to accept much larger deficits, and if not, what concessions will be preferred?
Article published on October 11, 2024 in our weekly Monde – News of the week
____________
1 The pre-budget does not provide the oil price assumptions underlying it. But the IMF’s (very close) forecasts are based on a gradual decline in oil prices from $82.5/barrel in 2024 to $71.9/barrel in 2027.
Related News :