Saudi Arabia Needs Pricier Oil to Balance Its Budget, IMF Says

(Bloomberg) — The International Monetary Fund expects Saudi Arabia won’t balance its budget if oil is below $80 a barrel, a revision that means the kingdom will move back into fiscal deficit after its first surplus in almost a decade.

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The fund’s latest projections put this year’s Saudi breakeven oil price at $80.9, up by more than a fifth from what it had forecast in October. Though an improvement from the past two years, it’s above the average for 2000-2019 and contrasts with a better outlook for some other top regional energy producers such as the United Arab Emirates.

The assessment aligns with the view of Bloomberg Economics, which estimates Saudi Arabia needs an oil price above $80 and perhaps closer to $100 to meet all spending commitments and ensure the stability of the social contract between the government and the citizens.

IMF’s Breakeven Oil Price Estimates for 2023

The changing budget calculus is putting the spotlight back on Saudi Arabia’s dependence on the flow of petrodollars into the government’s coffers to power expenditure on job creation and costly infrastructure. It also help explain a surprise decision made by the kingdom with OPEC and its allies in early April to cut oil output starting this month to support oil prices.

The IMF now forecasts Saudi Arabia will run a budget deficit of 1.1% of gross domestic product this year, a view that’s at odds with the government’s expectation for a second straight surplus it last estimated at 16 billion riyals ($4.3 billion).

Saudi Arabia doesn’t reveal its oil-price assumption for the budget and has stopped disclosing projected revenue from oil.

“Revenues are going to drop because the volume of production is going to be reduced,” said Jihad Azour, the IMF’s director for the Middle East, North Africa and Central Asia.

Speaking in an interview on Tuesday, Azour also sought to downplay the importance of the break-even oil price as a gauge of fiscal health.

‘Less Relevant’

“It’s becoming less relevant,” he said “The strategic benchmark is how you are performing according to your medium-term targets, and are you overshooting in terms of spending and so on.”

The IMF finalized its regional economic update before the unexpected move to cut more than 1 million barrels in daily output. Saudi Arabia, OPEC’s de facto leader and the world’s top oil exporter, agreed to slash production by 500,000 barrels a day.

The fund used the average of international benchmarks to assume oil prices at around $73 a barrel this year. The global crude benchmark held above $75 on Wednesday after closing at the lowest in more than five weeks.

The oil-rich economies of the Gulf region collected a windfall last year following disruptions in trade and output that stoked commodity prices after Russia’s invasion of Ukraine in February.

The outlook has turned far less favorable, spurred by concerns that the US may be headed for a recession and by Russia’s ability to keep crude exports flowing amid the war in Ukraine.

But the IMF is confident governments across the Gulf have sounder fiscal policies in place, making them less vulnerable to a downturn in prices after diversifying their revenues.

“Those countries have accumulated reserves,” Azour said. “They have to withstand any drop in oil revenues and this would be an additional incentive to increase the strategy of diversification that they are pursuing.”