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Saudi Arabia's 'realistic' 2020 budget assumes lower oil price than 2019: economists

Highlights

Saudi Arabia forecasting 2020 expenditure to dip 2.6%

Oil revenue projected to drop 14.8%

Growth seen at 0.4% in 2019, to reach 2.3 % in 2020

London — Saudi Arabia's 2020 budget, which signals an end to the expansionary trend of recent years, assumes lower oil prices than in 2019 as the government gets to grips with current price levels hovering around $60/b.

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Saudi Arabia is forecasting 2020 expenditure to fall 2.6% to Riyals 1.02 trillion ($272 billion) following a record Riyals 1.048 trillion budget for 2019 aimed at boosting growth.

"The 2020 budget figures are realistic and the projected deficit of 6.4% of GDP is likely to be achieved assuming an average Brent oil price of $58/b, and a cut in government spending," said Garbis Iradian, chief MENA economist at the Washington-based Institute of International Finance.

Nonetheless, lower Saudi oil production due to its compliance with OPEC+ production cuts means the kingdom will have to contend with lower oil revenue. Its oil revenue is forecast to plummet 14.8% to Riyals 513 billion in 2020 from Riyals 602 billion in 2019, according to the budget statement published on Monday.

"Our calculations suggest that the budget for 2020 assumes a more realistic average Brent price within a range of $61-64/b in 2020 (compared to our estimates of the MoF's 2019 range of $78-80/b)," said Ehsan Khoman, head of MENA Research and Strategy at Japan's MUFG Bank.

"We model our oil price assumptions used in the budget based on published data for oil revenues; certain assumptions for the effects of subsidies; and assumptions for the effects of oil production in conjunction with this month's OPEC+ 1.7m b/d production cut agreement (+0.4 million b/d voluntary Saudi cuts)."

SURPRISE CUT

The OPEC/non-OPEC alliance, led by Saudi Arabia and Russia, agreed last week to deepen their oil cuts to 1.7 million b/d from the current 1.2 million b/d until the end of March amid concerns of oversupply in the first quarter of next year.

The deal includes a surprise additional voluntary cut of 400,000 b/d by Saudi Arabia, which means the alliance's total production will actually be 2.1 million b/d lower through to the end of March.

Under the new deal, Saud Arabia's quota will be 10.145 million b/d, but the kingdom will produce 9.744 million b/d with the surprise additional cut.

Saudi Arabia has been producing under its quota for most of 2019, leading by example within the OPEC/non-OPEC alliance, and made up for lax compliance from other members, including Iraq, OPEC's second-largest oil producer, Nigeria and to a lesser extent Russia.

The world's biggest oil exporter is focusing on propelling non-oil growth as it seeks to wean the kingdom off oil income as part of Vision 2030, the brainchild of Crown Prince Mohamed bin Salman. Selling a 1.5% stake in crown jewel Saudi Aramco in the world's biggest IPO that valued the company at $1.7 trillion is a cornerstone of his reform vision. Proceeds from the $25.6 billion sale are expected to be invested by the Public Investment Fund, the country's sovereign wealth fund.

"Budget spending will be supplemented by state funds under the auspices of other vehicles, particularly the PIF through financing Vision 2030-related initiatives," said Maya Senussi, senior Middle East economist at Oxford Economics.

CONTINUED DEFICITS

However, lower oil revenues mean the kingdom will spend less on key sectors including subsidies and social benefits, according to the 2020 budget statement. Debt will also start to creep up and reserves will dip amid continued fiscal deficits, which will nonetheless narrow to 2.9% of GDP in 2022.

Growth, which is estimated at 0.4% in 2019, will reach 2.3 % in 2020, propelled by non-oil sector growth, according to government estimates. But analysts are skeptical.

"The ongoing oil output cutbacks and the low-trending oil prices impair the government's ability to stimulate the economy," said Senussi. "The figures cited by the government for GDP growth in 2019 and 2020 look somewhat optimistic."

-- Dania Saadi, dania.el.saadi@spglobal.com

-- Edited by Jonathan Fox, newsdesk@spglobal.com