The economy is set to grow again in 2024: The Finance Ministry is targeting GDP growth of 4.4% in its budget for the next fiscal year, Finance Minister Mohamed Al Jadaan said yesterday as he unveiled the government’s 2024 spending plans.

That’s welcome news after oil cuts see GDP set to contract by c. 0.5% y-o-y this fiscal year after growing 8.7% in 2022.

The biggest earmarks in the budget: The military (SAR 269 bn), healthcare (SAR 214 bn), education (SAR 195 bn), and public security (SAR 112 bn). Al Jadaan noted that Vision 2030 has a target of localizing over 50% of the Kingdom’s military equipment spending by 2030, adding that this also aims at boosting the country’s regional deterrence power.

Restructuring the social safety net: Spending on subsidies is forecast to increase to SAR 38 bn in FY2024, up from an estimated SAR 20 bn in the current fiscal year. In parallel, the Finance Ministry has slashed its earmark for social benefits, cutting it by SAR 35 bn to SAR 62 bn for 2024.

Total spending will rise to c. 29% of GDP next year, a move that Riyad Bank chief economist Naif Alghaith said will “really gives a push to the economy.” The ministry has penciled in spending of SAR 1.25 tn in FY 2024, up a bit from the previous year. Revenues will dip slightly to SAR 1.17 tn.

They key takeaway: “We intentionally decided to spend more and cause the deficit. If you spend that money right, on productive assets, then it’s money well spent,” Al Jaadan said.

The “cost of budget deficit is much lower than the expected return on investment,” Al Jadaan said in an address broadcast on the ministry’s YouTube channel. Continued investment in mega-projects to shore up the non-oil economy, encouraging the private sector, and improving public services are all hallmarks of the Kingdom’s spending plan, the minister said.

Expect more deficits in the medium term as gov’t prioritizes growth, economic diversification: The ministry is targeting a deficit of SAR 79 bn (1.9% of GDP) in the next fiscal year — and is signaling it will continue ot run deficits to support the “government’s strategic expansionary spending,” according to the budget statement (pdf). This is SAR 3 bn less than the SAR 82 bn (2% of GDP) estimated for the current fiscal year. The country’s debt is forecasted to rise to SAR 1.1 tn in FY 2024 (25.9% of GDP), up from an estimated SAR 1 tn (25.8% of GDP) in FY2023.

The deficit in context: Saudi Arabia had a budget surplus of 2.5% in FY 2022, but slipped into a modest deficit this year as it cut oil production.

The culprit? Voluntary oil cuts of 1 mn bpd from July until the end of the year, according to the World Bank’s latest Gulf Economic Update (pdf), out last week. The multilateral lender sees an 8.4% y-o-y contraction in oil activity in 2023 — the sector grew 15.5% in 2022. On the flipside, the non-oil economy will grow at a 4.3% y-o-y clip this year on the back of “looser fiscal policy, robust private consumption, and public investment drive,” cushioning the anticipated downturn, the World Bank writes. The ministry is penciling in a more optimistic growth of 5.9% for non-oil activity in 2023.

Oil would need to be at about USD 110 for the budget to balance by the time you include all state spending, including by the Public Investment Fund and other agencies, according to Bloomberg Economics.

Analysts across the board are happy with the budget, noting the medium-term emphasis on deficits indicates confidence in the state’s ability to secure funding — and welcoming the ongoing emphasis on investment in megaprojects.

Tags: