Pre-Budget 2022: A big turnaround year ahead

The Ministry of Finance (MoF) has set out a broadly conservative fiscal and growth targets for the next year in a recently unveiled Pre-Budget 2022 statement released on 30th Sep. The uncertainty surrounding the pandemic and the length and severity of supply chain bottlenecks for global economic growth appear to underpin authorities’ conservative targets, in our view. Overall, fiscal authorities eye; (i) strong all-round rebound in economic growth, (ii) major fiscal consolidation in both 2021/2022, and (iii) rebuilding macro cushion as enshrined in the Vision 2030. Given strong oil prices, as seen in 3Q, are expected to broadly prevail in 4Q, positive fine tuning of fiscal and growth targets at the time of final approval of the budget by the Council of Ministers is likely.

GDP: Big acceleration in economic growth seen

Supported by both oil and non-oil segment, the MoF has proposed a 7.5% Real GDP growth target for 2022 vs 2.6% estimated growth in 2021. Three key engines for Real GDP growth in 2022 are; (i) deepening of role of private sector in the overall economic activity, (ii) improved trade balance in light of more favourable environment for oil and (iii) the crucial support from Public Investment Fund (PIF) in spurring overall investment. The consistent drop in infection cases on the back of growing vaccination rate and expected further easing in precautionary measures, including foreign religious pilgrimage, lend further support to outlook. The MoF has also introduced minor changes in its medium-term macroeconomic projections with small 10bps uptick in 2023 GDP (to 3.6%) and 70bps reduction in CPI for 2022 (appears to be driven by higher base in 2021 largely).

Fiscal Targets: Conservative projections rolled out

The MoF has pencilled a 6% drop in overall budgeted outlay in 2022 (SAR 955bn or 30% of GDP), with a 3% reduction in total revenue relative to CY21 (revenue baseline from mid-year review of SAR930bn in FY21 retained). On expenditure side, MoF aims to stick to spending ceiling for medium term approved last years and accordingly builds in concurrent 6% YoY reduction in expenditure, implying significant drop in fiscal deficit to SAR85/52bn in 2021/22 (2.7/1.6% respectively for 2021/22 vs 11.2% in 2020). To us, total revenue forecasts leave possible room of upside potential in both 2021/22. We estimate the Pre-Budget 2022 incorporates USD60-65/bbl oil prices for 2022 (assuming no change in dividend policy of ARAMCO and trends in other revenue sources). Spending efficiency, positive role of PIF in driving capital expenditure and drop in economic cost of pandemic (economic support for businesses & individuals, health expenditure etc) will likely keep a lid on the overall expenditure in 2022.

Fiscal Financing: Rebuilding reserve cushion

For 2022, a balanced mix of borrowing is expected to fund the deficit (Gross financing of SAR124bn targeted to account for debt repayment of SAR40bn). Overall, public debt is expected to reach SAR989bn or 31% of GDP in 2022. The MoF aims to stick to its medium-term debt strategy of focusing on rebuilding central bank’s reserves and achieving fiscal balance by 2023. Public debt/GDP is expected to drop to 27.6% in 2024 due to combination of anticipated fiscal surplus and debt rollover.

Key risk factors

The three key risks to MoF projections stems from; (i) handling of current wave of COVID-19 in countries contributing heavily to 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.