Budget 2023: Consolidation in the bag; sustainability eyed

The recently released Budget Statement for 2023 incorporates minor tweaks (revenues, fiscal deficit, and growth) to estimates rolled out as part of preliminary statements in Oct-22. Following a strong year in growth (highest growth since 2011, size of GDP surpassing USD1trn mark for the first time), external (CA Surplus: 15.1% of GDP in 2022 vs. 5.4% in 2021), fiscal account (first fiscal surplus since 2013) and public debt (510bps drop in Debt/GDP), authorities are clearly focused on consolidating gains and building capacity for future sustainable growth via implementations of fiscal discipline and meaningful progress on a number of initiatives/targets under the Vision 2030.

Key aspects of Budget 2023 include; (i) projection of sustaining fiscal surplus over medium-term under conservative assumptions, (ii) trending down inflation to 2% (food prices normalizing +controlled commodity prices), GDP growth (high base-effect+ post COVID-19 normalization of economic activity) and (iii) higher medium-term expenditure ceiling (driven structural change in revenue profile). The upside and downside risks to estimates appear balanced in near-term.

Strong growth despite higher base, tough external environment

The MoF has made small revisions to 2022 (+0.5% to 8.5%) and medium-term GDP estimates. Largely, KSA growth momentum is set to moderate in 2023 following a strong acceleration in 2022 and expected dynamics of oil market. However, growth momentum is likely to pace up in the medium-term on the back of materialisation of a number of government initiatives, supported by PIF and NDF in spurring investment in strategic sectors crucial for delivery of objectives under the Vision 2030, and growing role of private sectors. CPI estimates for the medium-term (2.6/2.1%) are broadly unchanged. Regulated prices, stable currency regime and no major flare-up in food prices likely underpin normalization of CPI though risk of possible upside remains.

Fiscal Targets: Surplus seen despite higher expenditure ceiling

Given more visibility in non-oil revenues, the MoF has now pencilled higher fiscal surplus in both 2022 and 2023 relative to its earlier projections. The ministry projects fiscal surplus to sustain over the medium-term in the baseline scenario. Expenditures are projected to range SAR1.1-1.3trn over 2023-2026 (or 27-29% of GDP). Revenues are projected at 28-29% of GDP and implied oil prices under the base-line scenario of estimated USD75/bbl (USD70-72 in Pre-Budget 2023). Relative to start-of-the-year estimates in 2022, revenues generation (SAR189 or 18%) is expected to surpass expenditure overrun (SAR176bn or 18%), allowing delivery of higher fiscal surplus. That said, medium-term estimates leave room for upside risks for revenues 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

MoF has guided for the three key areas for utilizing projected fiscal surplus as; (i) rebuilding further fiscal cushion (reserves 29 import cover in Sep-22 vs. an average of 38M since 2017) 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 3Q is quoted at SAR972bn (24.7% of GDP), down from Dec-21 levels of 30%. During 9M22, MoF has made timely additional borrowing over & above 2022 repayments in order to save interest cost from interest rate hike Assuming MoF sticks to its strategy of maintaining debt level, Public debt/GDP is expected to drop to 22.6% by 2025. This is in-line with our estimates (Pre-Budget 2023).

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.