Oil decline may lead to biggest deficit since 2020 -Goldman Sachs

Budget deficit at risk of hitting USD 67 bn following oil price dips:The Kingdom’s budget deficit could widen to USD 67 bn (SAR 251.5 bn), or over 6% of GDP, in a scenario where oil prices average USD 62 per barrel in 2025, Goldman Sachs economist Farouk Soussa told Bloomberg. The projection would mark the biggest shortfall since the 2020 pandemic.

The breakdown: If prices remained around USD 62 a barrel this year, the budget deficit would rise significantly to around USD 70-75 bn, up from around USD 30-35 bn, Soussa told CNBC. The government needed oil at USD 93 a barrel to balance last year’s budget, according to Bloomberg Economics’ Chief Emerging Markets Economist Ziad Daoud.

Somewhat in line with recent forecasts: “The breakeven oil price for Saudi Arabia is USD 82-83 a barrel, so … you can expect a very big budget deficit between 4-5% this year, up from 2.3% in 2024. If oil prices drop to the USD 50 range, it could widen even further,” EFG Hermes’ Head of Research Ahmed Shams El Din told us last week.

.. and way above Riyadh’s initial plans: The government expected the budget shortfall to come in at 2.3% of GDP in the current fiscal year and to “continue at similar levels over the medium term.”

This shortfall poses a major risk to the non-oil sector, which Daoud warns will bear the brunt of falling oil revenues. “Lower prices mean spending cutbacks, slowing construction and reducing public-sector hirings,” Daoud added. Soussa shared a similar concern, saying that the Kingdom will need to see “some fiscal adjustment” as well as “a more aggressive re-prioritization” regarding projects.

More borrowing on the table? Unless spending cuts are made, the Kingdom could borrow an additional USD 16.5 bn before the year ends, Tim Callen, a visiting scholar at the Arab Gulf States Institute in Washington, told Bloomberg. Riyadh would also need to consider alternatives to the current volatile international markets to bridge the funding gap, including cutting spending, raising taxes, or selling stakes in its assets, Soussa told CNBC.

REMEMBER- The borrowing plan for FY 2025 outlined a requirement for some SAR 139 bn (USD 37 bn) in new public debt. The targeted amount is intended to bridge an anticipated SAR 101 bn (USD 27 bn) budget deficit penciled in for the new fiscal year, in addition to covering some SAR 38 bn required to meet principals’ repayments for loans maturing during the period.

BUT- Saudi Arabia still has a strong financial position, with USD 410.2 bn in reserves as of January. The country also saw its long-term foreign currency issuer credit rating get an A+ from both S&P and Fitch. Soussa emphasized that the Kingdom won’t jeopardize its financial stability or risk de-pegging its currency just to maintain current spending levels. “That’s just not going to happen.”