(Bloomberg) -- Saudi Arabia slashed its economic growth forecasts and projected deeper budget deficits than previously estimated as the cost of efforts to overhaul the kingdom’s economy outpace revenue.
Economic output is now seen growing at 0.8% this year, down from a prior forecast of 4.4%, according to fresh estimates in a report from the Finance Ministry on Monday. Projections for 2025-2026 were also significantly scaled back.
The Finance Ministry projected a wider budget shortfall of about 2.9% of GDP for 2024. Deficits are seen at 2.3% of GDP in 2025 and 2.9% in 2026, also both worse than previously expected.
Deficits are forecast to persist due to “expansionary spending policy intended to support economic growth,” the ministry said.
Saudi Arabia has been undertaking massive investment and spending as it seeks to drive Crown Prince Mohammed bin Salman’s Vision 2030 agenda to diversify the economy away from oil. Already the kingdom has been re-prioritizing projects, in part because oil prices remain far below what’s needed to balance the budget.
The kingdom needs crude at $96 a barrel to reach equilibrium in its finances, according to the International Monetary Fund. Bloomberg Economics puts the so-called breakeven at $112, once domestic spending by the Saudi sovereign wealth fund is taken into account.
Brent crude is currently trading around $72 a barrel and Saudi Arabia’s decision to delay planned oil production increases risk exacerbating the strain on government finances.
Saudi officials say they base forecasts on conservative assumptions for oil revenue. The government also says it’s less focused on headline growth because of the influence of crude output and is aiming for non-oil industries to be a bigger driver of the economy in the future.
High Uncertainty
Saudi Arabia slightly upped revenue projections for 2024 but cut its view for each of the next two years. Expenditures forecasts were increased for this year and curbed for 2025-2026.
“The fiscal outturns for 2024 are more or less in line with our expectations, but the uncertainty around the 2025 numbers is high,” said Farouk Soussa, Goldman Sachs Group Inc.’s Middle East and North Africa economist.
“On the expenditure side, the Saudis are forecasting a cut in spending, but persistent past spending overshoots make this doubtful,” he said. “On the revenue side, there are big questions around production targets and global oil prices.”
With the Saudi budget having been in deficit for multiple quarters, and foreign direct investment slow to materialize, the kingdom has become one of the biggest issuers of international debt in emerging markets this year.
It plans to continue borrowing to meet the 2025 estimated financing needs, according to Monday’s statement. S&P Ratings Agency said earlier this month that Saudi Arabia remains in a comfortable position to sustain a period of borrowing given the government’s low debt levels.
New projections for 2027 show the kingdom expects GDP growth of 4.7% that year and a budget deficit of 3% of GDP.
“We see the fiscal projections as looking to balance support to the transformation programme, while maintaining contained deficits,” said Monica Malik, Chief Economist at Abu Dhabi Commercial Bank.
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