Pre-Budget 2023: From turnaround to sustaining momentum

The Preliminary Budget for 2023 unveiled by the Ministry of Finance on 30th Sep seeks to further build on the strong economic momentum and fiscal consolidation achieved in 2022 to accelerate the progress towards targets under Vision 2030. Despite incorporating apparently conservative estimates, authorities have pencilled; (i) continuation of fiscal surplus to sustain in future to further strengthen fiscal sustainability, (ii) inflation (regulated prices + commodity price drop) and GDP growth (high base-effect+ post COVID-19 normalization of economic activity) to normalize and (iii) higher medium-term expenditure ceiling (likely driven by higher allocation for capital expenditure and subsidy benefits). The room for further fine tuning of estimates at the time of approval of the budget by the Council of Ministers for both 2022 and 2023 remains in view of performance in 1H2022 and favourable oil price environment.

GDP: Major revision in 2024 estimate, no major change in 2023

While the MoF has left the GDP (8/3.1%) and CPI estimate (2.6/2.1%) unchanged for 2022/23, medium-term projections show significant revisions in 2024/25 GDP estimates to 6/4.5% from previous 3.6/3.3% respectively. The revisions are partially explained by; (i) ramp-up in investment as a result of a number of structural reforms and initiatives, and (ii) higher consumption. Private sector will likely remain a major driver of future growth. Meanwhile, the role of Public Investment Fund (PIF) remains important in spurring investment in strategic sectors crucial for delivery of objectives under Vision 2030. CPI estimates for the medium-term (2/2.1%) are broadly unchanged. Regulated prices, stable currency regime and no major flare-up in food prices likely underpin normalization of CPI.

Fiscal Targets: Surplus seen despite higher expenditure ceiling

Concurrent to revision in the medium-term estimates for GDP, estimates for total budget outlay and revenues build in significant revisions. More importantly, the MoF now projects recurring fiscal surplus over medium-term with more visibility on non-oil revenue as a result of past efforts on diversifying revenue base, and favourable oil dynamics. MoF has proposed upward revision in expenditure ceiling by 17/18% over 2023/2024. Expenditure over medium-term is expected to range 26-29% of GDP (SAR1.1trn). Greater focus on social benefit and protection and support for strategic initiatives (Capex: ~4% of GDP) likely account for the revision. Projections for fiscal Revenues have also been revised up in tandem by 15-16% (28-29% of GDP). We estimate the Pre-Budget 2023 incorporates USD70-75/bbl oil prices for 2023 (USD60-65/bbl in 2022, see details inside). To us, total revenue forecasts leaves possible room for upside risks in both 2022/23 from three sources; (i) higher oil prices, (ii) revision in Aramco dividend, & (iii) preponing of major oil projects. 

Fiscal surplus to be used for higher fiscal sustainability

The three key areas for utilizing projected fiscal surplus are; (i) rebuilding further fiscal cushion (reserves 30-month import cover in July vs an average of 38-month) in order to enhance fiscal sustainability, strengthening public funds and accelerating projects of strategic importance. The MoF has proposed sticking to its strategy of repaying the debt principals from fresh borrowing. Overall debt in 1H is quoted at SAR967bn (24.5% of GDP), up 4% from Dec-21 levels. Despite fiscal surplus (3.4% of GDP in 1H), the MoF has raised additional financing in 1H22, over and above debt repayment, ahead of interest rate hikes. Assuming MoF sticks to its strategy of maintaining debt level, Public debt/GDP is expected to drop to 22.7% by 2025.

Key risks ahead

The four key risks to MoF projections stems from; (i) any risk to global economic growth as major economies deal with record inflation and reversal of COVID-era monetary stimulus (ii) dynamics of oil markets, (iii) any regional or global COVID-like challenge, and (iv) delays in major projects or non-materialization of anticipated benefits.