Saudi Arabia cuts growth prospects and sees bigger budget deficits

Saudi Arabia cut its growth forecasts and raised budget deficit estimates for fiscal years 2024 to 2026, looking ahead to a period of higher spending and lower expected oil revenues.

Real gross domestic product is expected to grow 0.8% this year, down dramatically from a previous estimate of 4.4%, according to the latest pre-budget report released by the Finance Ministry on Monday. The GDP growth forecast for 2025 has also been lowered from a previous estimate of 5.7% to 4.6%; while the outlook for 2026 has been adjusted from 5.1% to 3.5%.

“The 2025 budget highlights the Kingdom's commitment to accelerate regulatory and structural reforms, as well as policy development,” the pre-budget report said. “It also focuses on transformative spending to promote sustainable economic growth, enhance social development and improve the quality of life.”

The latest report further highlighted the Saudi government's plans to leverage sovereign and development funds “for capital investments while enabling both the private and non-profit sectors to promote growth and prosperity.”

Saudi authorities also expect the budget to remain in deficit in the coming years as the kingdom prioritizes spending to achieve the goals of its Vision 2030 plan to modernize and diversify the heavily oil-dependent Saudi economy.

The Finance Ministry forecast a wider budget deficit of around 2.9% of GDP for 2024, compared to a previous projection of 1.9% for the year. It predicted deficits of 2.3% and 2.9% in 2025 and 2026 respectively, also larger than previous estimates.

Saudi Arabia's fiscal break-even oil price – what it needs to cost the country a barrel of crude oil to balance its government budget – has risen in recent months and years and, along with spending increases, could rise further to rise.

The IMF's latest forecast, published in April, put the 2024 budget breakeven figure at $96.20, up about 19% from the previous year. The figure is also about 36% higher than the current price of a barrel of Brent crude, which was trading around $70.70 on Tuesday afternoon.

Oil prices are expected to remain subdued at least in the medium term, amid declining demand and increased global supply.

Saudi Arabia hosts major international events that require big spending – such as the 2034 World Cup and Expo 2030 – and is building multi-trillion-dollar mega-projects such as Neom, which is backed by the kingdom's giant sovereign wealth fund, the Public Investment Fund. .

“Saudi Arabia's GDP dances to the rhythm of oil, and with recent data from the Treasury Department, it is clear that while oil is booming, so is the economy,” said Tarik Solomon, chairman emeritus of the U.S. Chamber of Commerce Commerce in Saudi Arabia. DailyExpertNews. “But when wells slow down, so does growth.”

According to the International Monetary Fund, Saudi Arabia's national debt has grown from around 3% of GDP in the 2010s to roughly 28% today – a huge jump, but still low by international standards. For example, public debt in EU countries averages 82%. In the US, that figure was 123% in 2023.

The relatively low debt level and high credit rating make it easier for Saudi Arabia to take on more debt if necessary. The kingdom has also implemented a series of reforms to boost and reduce the risks of foreign investment and diversify revenue streams. While the country's economy has shrunk for the last four quarters in a row, non-oil economic activity grew at an annual rate of 4.4% in the second quarter, up from 3.4% in the previous quarter.