Surge In Spending Sends Saudi Budget Back Into The Red

Saudi Arabia’s government recorded a deficit of SR2.9 billion ($770 million) in the first quarter of the year, as spending shot up by 29% year-on-year while oil revenues fell back by 3%.

The development marks a sharp acceleration from 2022, when spending rose by 12%. Over that year as a whole, the authorities posted a budget surplus of 2.5% of gross domestic product (GDP).

The government had been expected by Moody’s Investors Service and other analysts to maintain a balanced budget in 2023 and 2024. However, the figures for Q1 have prompted one local bank to predict the government will now run a deficit for this year.

Although oil revenues slipped back in the opening months of 2023, overall government revenues rose by a modest 1% in the first quarter, helped by strong receipts from value-added tax (VAT) and other levies. Total non-oil revenues rose 9% compared to the same period in 2022.

The rise in spending at the start of this year was broad-based, but local investment bank Jadwa Investment noted there had been a 75% increase in capital expenditure, with the figure driven higher in part by the rising cost of imported goods.

Also notable was the 7% increase in the public sector wage bill to SR134 billion ($35.7 billion). This is the biggest single element of state spending and accounts for almost half (47%) of the total budget.

At first glance, that rise suggests the recent fall in unemployment may have been caused, at least in part, by a hiring spree by the government. However, Jadwa noted in a report on the Q1 budget issued this week that “the pick-up [in wage costs] is not easy to explain, given official data showing a fall in civil service employment during 2022”. Instead, it suggested a combination of wage inflation and additional end-of-service payments may be the reason for the increase in costs.

Other areas of current expenditure rose even more sharply, with a 52% year-on-year rise in the cost of social benefits, reflecting a decision in July last year to offer additional help to Saudis to help them deal with the impact of inflation. In a similar vein, there was a 24% increase in the cost of subsidies.

Jadwa said in its report that the spike in spending means the government could run a modest fiscal deficit for the year as a whole, of perhaps a couple of percentage points of GDP. While there have been signs of a tightening in domestic banking liquidity, the investment bank sad there was “plenty of scope to increase external borrowing to meet fiscal financing”.

Oil market trends

The government’s financial position may also be helped by the recent announcement by local oil giant Saudi Aramco that it was considering paying a “performance-related divided” to its shareholders, on top of the basic dividend it already hands over.

The Saudi government holds the vast majority of shares in the company and Jadwa estimates that the new dividend – which will be based on the level of free cash flow – could be worth an additional 2% of GDP to the government.

However, there are other trends at play in the oil sector. Oxford Economics, a UK-based consultancy, has said the Saudi government’s oil revenues could fall further because the country has pledged to cut its crude production by 500,000 b/d in May, in line with the Opec+ agreement with other oil producers.

The IMF has estimated the government needs an average oil price of $80 a barrel to balance its budget, but that figure may have to be revised upwards in light of the recent rise in spending. Oil price expectations are not much higher than that level though, with Moody’s predicting an average oil price of around $85 a barrel this year, falling to $83 a barrel in 2024.