Fiscal consolidation with an eye to Vision 2030 goals

The Council of Ministers accorded approval to the preliminary budget with no major changes in fiscal and macro targets. In the backdrop of significant spending overrun in 2020 due to dual shock of oil prices and COVID-19 pandemic, Budget 2021 appears to be a clear attempt by the government to return to fiscal consolidation path while, at the same time, optimizing progress on government’s economic reforms, in our view. A 7% drop in budgeted outlay (SAR 990bn or 35% of GDP), coupled with 10% growth in total revenues (SAR 849bn or 30% of GDP), is estimated to reduce fiscal deficit by over 50% to SAR141bn (or 4.9% of GDP in 2021 vs 12% in 2020). Fiscal targets are broadly achievable, we opine, and rely on drop in economic cost of pandemic, stability in oil prices at current levels and spending discipline.

Rebound in GDP growth ahead 

Real GDP growth target is set at 3.2% for 2021 vs an estimated drop in GDP of -3.7% in 2020. Both oil and non-oil sectors are expected to rebound given positive outlook on global oil demand and increase in non-oil economic activity in the Kingdom post easing of COVID-19 related restrictions. The government has set 26% lower target for CapEx (SAR 101bn in 2021 vs SAR 137bn in 2020) given higher base of previous years, higher expected participation of state-owned investment companies and private sector in the investment projects.

 Fiscal targets look achievable

Governments’ total revenues growth estimate in 2021 is underpinned by 31% jump in taxes (primarily full-year impact of increase in VAT & Custom duty), normalization of economic activity and 3% jump in other revenues (oil + non-oil, non-tax revenues). We estimate Budget 2021 builds in 55-60% contribution from oil revenues (based on USD45-50/bbl oil prices, details inside). Reversal of all major expenditure heads to pre-COVID-19 level, except for Goods & Services and Interest Payment (higher stock of debt), is expected to deliver 7% drop in total expenditure. Higher medical purchases and associated expenditure on COVID-19 (including economic support package) drove a 15% jump in Goods & Services. The government has rightly provisioned for continued elevated level of health expenditure in 2021, in our view.

Balanced fiscal financing plan

A balanced mix of borrowing and reserves drawdown (58/42% respectively) is expected to fill the financing gap in 2021. The government expects to achieve debt to GDP ratio of 33% in 2021 and 32% by 2023 via control over deficit and 15% growth in nominal GDP. Despite accumulation in stock of debt in recent years, KSA’s debt to GDP remains significantly below relative to its peers.

Key risk factors

Four key risks factor to fiscal and macro estimates are; (I) breakdown in OPEC+ alliance and oil price volatility, (II) below-expected global economic growth, (III) prolonged COVID-19 pandemic, and (IV) unexpected production disruption at ARAMCO’s facilities.