Efficient spending, higher oil output reduce Saudi Arabia’s vulnerability to oil prices: IIF

With the crude oil prices hovering slightly above $60 a barrel and a higher Saudi crude oil production expected in 2020, the Kingdom’s medium-term fiscal vulnerabilities to oil prices have softened despite a lower budgeted spending, the Institute of International Finance (IIF) said in its latest report.

IIF report noted that the preliminary estimates by Saudi Arabia has put actual spending in 2019 at SAR 1.048 trillion, well below the budgeted SAR 1.106 trillion.

It added that the 2020 budget announced on December 9, sets expenditures at SAR 1.020 trillion, which is 2.7% lower than the preliminary estimates for 2019.

“The fiscal trajectory is much more secure than a few months ago given the efforts underway to restrain spending, and assuming that oil prices remain slightly above $60 a barrel,” IIF noted, while lowering its forecast for Saudi Arabia’s fiscal deficit from 7.5% of GDP to 6.6% in 2020.

IIF also added that the recent reforms to strengthen government procurement have helped to improve the efficiency of public spending.

Saudi Arabia’s non-oil real GDP is expected to grow at a solid pace of 2.7% in 2020 driven by the ongoing reforms, prudent public spending, and recovery in the private sector activity supported by monetary easing, according to the Washington-based institute.

“We are encouraged by the improvement made in expenditure management, including major reduction in fuel subsidies and streamlining inefficient capital expenditures,” IIF report noted.

It also expected overall real GDP to shift from a contraction of 0.3% in 2019 to a growth of 1.9% in 2020, as crude oil production is projected to increase slightly.

“Given the recent OPEC+ agreement, and as the Jizan refinery became fully operational, we expect oil production to increase slightly in 2020, following a decrease of 3% in 2019,” the report maintained.

The report however cautioned that if oil prices drop to $50 a barrel next year, the deficits would remain large and the debt-to-GDP ratio could exceed 40% by 2023.