Debt surge is around the corner despite fiscal tightening: The Kingdom’s public debt is expected to climb further, even as the government implements tighter fiscal policies, according to a recent Capital Economics’ research note seen by EnterpriseAM.

(** Tap or click the headline above to read this story with all of the links to our background and outside sources.)

Data breakdown: Over the past decade, the government debt climbed from less than 2% of GDP in 2014 to around 30% of GDP last year, and is expected to reach 34.8% of GDP this year, according to IMF data.

Over the last decade, “the Kingdom has been among the largest EM issuers of international debt alongside issuance by the other Gulf countries, this has supported compressing the spread of the JP Morgan EMBI Index over US Treasuries, which recently shrank to its lowest level since before the global financial crisis,” the research note read.

Capital Economics projects Saudi Arabia’s public debt to rise to just over 60% of GDP by 2030. If this happens, risk premia on the Saudi sovereign would likely climb from current low levels. “The Kingdom would probably start to cross the thresholds of many of the subcomponents of our sovereign risk indicator, pushing it from low to moderate risk,” the research note read.

The government is already tightening fiscal policies, but these measures might not be enough to put the brakes on the debt-to-GDP ratio acceleration, the agency said.

No need to worry: Our government debt levels remain relatively low compared to other countries, the agency noted. This accumulation of debt has also been a strategy to cushion the impact of past oil price shocks, such as those seen in the middle of the last decade and during the pandemic.

DATA POINT- Total public debt stood at SAR 1.39 tn at the end of the second quarter, with domestic debt amounting to SAR 871.3 bn, while external debt reached SAR 515.1 bn. Debt issuances during the first half of the year included SAR 197.6 bn of domestic debt and SAR 54 bn in external debt.

Looking ahead, the research house expects that increasing oil output would continue to bolster headline GDP growth through the remainder of this year and into the next. However, this is expected to obscure a slowdown in non-oil growth, as the Saudi government intensifies fiscal tightening, the agency noted.

How does this compare to other forecasts? Fitch Ratings has said in a recent note that the government debt is projected to rise to 35.1% of GDP by 2027, compared to 29.7% of GDP this year, due to fiscal deficits. “The sovereign is adjusting capex to support the fiscal position, although execution of the large project pipeline and new infrastructure projects will constrain the pace for substantial cuts,” Fitch said earlier this month. The rating agency affirmed Saudi’s long-term foreign-currency issuer default rating at A+ with a stable outlook, citing its robust fiscal position and strong external balance sheets.

Tags: