(Bloomberg) -- Saudi Arabia’s current account balance is set to flip into deficit as oil prices decline and imports related to huge projects meant to transform the economy rise, the International Monetary Fund said.
The kingdom will probably see a deficit of 0.1% of gross domestic product this year and 1.1% in 2025, according to the Washington-based lender’s so-called Article IV review of the Saudi economy. The IMF expects an average shortfall of 2.9% from 2026-2029.
That would mark a significant turn around from 2022, when crude soared to almost $130 a barrel after Russia’s invasion of Ukraine and Saudi Arabia’s current account surplus was almost 14% of GDP. Prices have since fallen, in recent months because of concerns about the state of the US and China’s economies. This week, Brent has slumped more than 7% to around $73 a barrel, far below what the kingdom needs to balance its budget.
“If oil production were to decrease and export proceeds were to decrease consequently, then we would have a current account balance that would be significantly lower,” Amine Mati, the IMF’s mission chief for Saudi Arabia, said in an interview with Bloomberg Television on Wednesday.
Even so, the kingdom has enough foreign reserves to cover the shortage, and the economy is still well balanced, as are risks to the country’s outlook, the IMF said.
The IMF also said Saudi Arabia’s non-oil growth — a key gauge of the government’s efforts to diversify the economy — is robust. Unemployment is at record lows and inflation in the country, which pegs its currency to the US dollar, is contained.
A recalibration of spending priorities when it comes to projects supporting Crown Prince Mohammed bin Salman’s Vision 2030 plan should help ease pressure on fiscal and external balances and reduce risks of overheating, the IMF added.
It recommended Saudi Arabia presses on with reforms to attract more more investment, including from abroad, and said the kingdom should consider introducing property and income taxes to boost non-oil revenues.
“There is quite a bit of room on a number of taxes,” Mati said. “Property taxes are non existent. If you compare to other advanced economies, that could bring you an additional 2% of GDP.”
The IMF sees Saudi Arabia’s $1.1 trillion economy growing 1.7% this year and 4.7% in 2025, assuming oil production cuts are gradually phased out from October.
GDP shrank 0.4% on an annual basis in the second quarter but is expected to return to growth of almost 4% in the current period, according to forecasts compiled by Bloomberg. That would be the strongest acceleration since late 2022.
A key question is how the latest weakness in global oil markets — and what it means for OPEC+’s supply policy —affect the kingdom. The oil cartel, led by the Saudis and Russia, is considering delaying the plans to raise output later this year, Bloomberg reported on Wednesday.
The IMF estimates Saudi Arabia needs oil prices at $96 a barrel to balance its budget, more than $20 higher than current levels. Bloomberg Economics puts the break-even at $112, once domestic spending by the kingdom’s sovereign wealth fund is taken into account.
The Public Investment Fund raised $2 billion of bonds on Tuesday, taking its total issuance this year to almost $10 billion. If oil prices don’t rise, it’s likely to sell even more bonds in future to help finance its investment plans in the kingdom, Morgan Stanley analysts say.
The Saudi government itself also has plenty of room to issue more debt to support investments, according to Goldman Sachs Group Inc.’s Middle East and North Africa economist, Farouk Soussa.
“They can borrow a whole bunch of money and that’s not going to be a problem from a debt sustainability perspective,” Soussa said in an interview. “They’ve got a huge amount of reserves. They can run current account deficits for a long time and finance those deficits with borrowing.”
Soussa sees Saudi Arabia recording a current account deficit of 0.8% of GDP this year, assuming an average oil price of $81 a barrel.
(Updates with IMF insights and comments from Goldman Sachs. An earlier version corrected Mati of the IMF’s title.)
©2024 Bloomberg L.P.
