Stage set for a sustained fiscal surplus

Following approval from the Council of Ministers, the Ministry of Finance (MoF) unveiled the Budget Statement 2022, building up from the preliminary budget statement released on 30th Sep 2021. Overall, the budget reflects the authority’s aspiration for fiscal sustainability, economic reforms to ensure sustainable growth, and strengthening fiscal cushion to allow more flexibility in future countercyclical policy measures. In a major change, MoF now expects the Kingdom to return to a fiscal surplus position in 2022, one year ahead of its earlier guidance carried in the Preliminary Budget. Other changes include fine-tuning of GDP growth projections for 2021/2022 (to 2.9%/7.4%, +30bps/-10bps) and Debt to GDP (to 25.9% in 2022) projections.

 

GDP growth: A transformative year in the offing

A slew of economic and health measures aimed at cushioning the damage of pandemic has allowed a swift economic recovery in 2021 with authorities now estimating GDP growth of 2.9% in 2021 (vs 4.1% decline in 2020). With 7.4% GDP projected growth, 2022 is shaping up to be a transformative year for KSA as both engines of economic growth (oil, non-oil) are seen to be firing. Three key drivers for Real GDP growth in 2022 are; (i) deepening of the role of the private sector in the overall economic activity, (ii) improved trade balance in light of a more favorable environment for oil, and (iii) the crucial support from the Public Investment Fund (PIF), in spurring overall investment. We continue to see possible upside risk to MoF’s inflation estimate of 1.3% for 2022.

 

2022  fiscal targets recalibrated

The MoF made no changes in the overall budgeted outlay in 2022 of SAR 955bn (or 27% of GDP), pencilling a 6% YoY drop as authorities aim to stick to spending ceiling for medium-term approved last year. Total revenues are concurrently budgeted to jump by 12% YoY in 2022 (earlier 3% drop) with a major contribution from higher oil revenues. Overall, MoF budgets SAR90bn fiscal surplus in 2022. MoF new estimates appear more realistic to us and incorporate USD70-75/bbl oil prices for 2022 as per our estimate (assuming no change in dividend policy of ARAMCO and trends in other revenue sources, see details inside). Spending efficiency, the positive role of PIF in driving capital expenditure, and a drop in the economic cost of the pandemic will likely keep a lid on the overall expenditure in 2022. We also hasten to highlight that despite upside risks to inflation estimates, inflation in Saudi Arabia is expected to remain significantly lower compared to its key emerging and developed market peers.

 

Conservative medium-term targets set

The MoF expects the surplus budget to prevail over 2023-24 despite incorporating conservative estimates for revenues (7% drop in 2023) under the Fiscal Policy Sustainability Program. Real GDP is projected at 3.5/4.0% for 2023/24.

 

Clear Fiscal strategy outlined

The MOF has clearly outlined its strategy for the use of anticipated fiscal surplus. Over the medium term MoF targets i) debt repayment via fresh borrowing with possible opportunities of early retirement, ii) rebuilding central bank’s reserves, and iii) continued support for PIF and other development funds for economic and social programs. Public debt is expected to reach SAR938bn or 25.9% of GDP in 2022 and continue trending down to 25.4% by 2024, significantly lower than the debt ceiling of 50%.

 

Key risk factors

The three key risks to MoF projections stem from; (i) handling of the current wave of COVID-19 in countries contributing heavily to the religious tourism in the Kingdom or its key trading partners, (ii) timing and scale of supply chain constraints for the global economic growth, and (iii) timing and magnitude of reversal of monetary stimulus in major economies and its impact on anticipated global economic growth.