Saudi Arabia, a nation whose economy heavily relies on oil, has recently made significant adjustments to its growth forecasts and budget projections. With the global oil market showing signs of slowing demand and increasing supply, the kingdom has slashed its growth expectations and widened its projected budget deficits for the upcoming years. As Saudi Arabia continues its ambitious Vision 2030 plan, which aims to diversify its economy, the current financial landscape suggests a shift toward higher spending and the necessity to embrace new economic strategies.
In this article, we’ll explore deep into Saudi Arabia’s revised economic forecasts, the driving factors behind these changes, and what they mean for the kingdom’s future.
The Revised Growth Forecasts
Saudi Arabia cut its growth forecasts for the coming years, projecting a much slower pace of economic expansion. The latest pre-budget report released by the Ministry of Finance provides a clear picture of where the kingdom is headed:
- 2024: Real gross domestic product (GDP) is now expected to grow by 0.8%, a steep drop from the previously anticipated 4.4%.
- 2025: GDP growth expectations have been reduced from 5.7% to 4.6%.
- 2026: The growth outlook has also been cut from 5.1% to 3.5%.
These downward revisions reflect the challenges Saudi Arabia is facing, especially given its reliance on oil revenues, which are becoming less predictable.
Wider Budget Deficits on the Horizon
Along with reduced growth forecasts, Saudi Arabia is also bracing for wider budget deficits in the coming years. The kingdom is anticipating increased government spending as part of its efforts to stimulate the economy and achieve the goals set out in its Vision 2030 plan.
- 2024: The projected deficit is 2.9% of GDP, compared to an earlier estimate of 1.9%.
- 2025: The deficit is expected to be around 2.3%.
- 2026: Another deficit of 2.9% is anticipated.
This increase in projected deficits indicates that the kingdom is committed to spending more, despite a more challenging revenue outlook, particularly from oil.
The Oil Dependency Dilemma
Saudi Arabia’s economy is deeply intertwined with the global oil market. In fact, the nation’s fiscal health often mirrors the state of the oil industry. When oil prices are high, the kingdom experiences growth; when they drop, so does the economy.
In recent years, Saudi Arabia’s fiscal breakeven oil price—the price it needs per barrel of crude to balance its budget—has been rising. According to the International Monetary Fund (IMF), this figure is expected to reach $96.20 per barrel in 2024. This is a significant increase from previous years, and it’s also much higher than current oil prices, which are hovering around $70.70 per barrel.
This growing gap between the breakeven price and actual oil prices poses a challenge for Saudi Arabia. If oil prices continue to remain subdued, the kingdom will have to find alternative revenue sources or take on more debt to balance its budget.
Global Oil Market Trends
The global oil market is undergoing a shift, with several factors at play:
- Slowing Demand: As more countries transition to renewable energy sources and improve energy efficiency, the demand for oil is expected to slow down.
- Increased Supply: Major oil producers, including Saudi Arabia, have been increasing production to meet global demand, but this has also led to an oversupply in the market, pushing prices down.
Given these dynamics, it’s clear that Saudi Arabia cannot rely solely on oil revenues for sustained economic growth. The kingdom needs to diversify its revenue streams to remain financially stable.
The Vision 2030 Plan: A Ray of Hope?
In response to these economic challenges, Saudi Arabia is pressing forward with its Vision 2030 plan, which aims to reduce the country’s reliance on oil and transform the economy. The plan focuses on key areas such as tourism, technology, and infrastructure development.
One of the most ambitious projects under Vision 2030 is Neom, a multi-trillion-dollar megacity backed by Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF). Neom is expected to serve as a hub for innovation and attract foreign investment, creating jobs and diversifying the economy.
Other significant investments include major international events like the World Cup 2034 and Expo 2030, which will require massive spending but also offer the potential to boost non-oil economic activity.
Sovereign and Development Funds: The Investment Strategy
Saudi Arabia is also leveraging its sovereign and development funds to stimulate growth. The latest pre-budget report highlights the kingdom’s commitment to deploying these funds for capital investment while empowering the private and non-profit sectors. This strategy is designed to foster growth and prosperity while reducing the country’s dependence on oil revenues.
These investments, along with the kingdom’s focus on regulatory and structural reforms, are expected to create a more resilient economy that can withstand future shocks in the oil market.
Public Debt: A Growing Concern
Saudi Arabia’s public debt has increased significantly in recent years. In the 2010s, the kingdom’s debt was just 3% of GDP, but today it stands at around 28%. Although this is a considerable jump, Saudi Arabia’s debt level is still relatively low by international standards. For example:
- The European Union average is 82% of GDP.
- The United States had a debt level of 123% of GDP in 2023.
Despite the increase in public debt, Saudi Arabia’s high credit rating and relatively low debt level give it some breathing room to take on more debt if necessary. However, as the country continues to spend heavily on megaprojects and international events, managing this debt will be crucial.
Non-Oil Economic Growth: A Positive Sign
While Saudi Arabia’s overall economy has contracted for the last four consecutive quarters, there’s a silver lining: non-oil economic activity is on the rise. In the second quarter of this year, non-oil activity grew by 4.4% year-on-year, up from 3.4% in the previous quarter. This growth reflects the success of some of the kingdom’s diversification efforts under Vision 2030.
The challenge, however, is sustaining this growth and expanding it across more sectors of the economy. While the non-oil sector shows promise, it will take time for it to make up for the kingdom’s heavy reliance on oil revenues.
The Road Ahead for Saudi Arabia
Saudi Arabia is at a crossroads. The kingdom’s economy has long been driven by oil, but the changing global energy landscape is forcing the country to rethink its approach. The reduced growth forecasts and wider budget deficits are a reflection of this transition.
However, Saudi Arabia’s ambitious Vision 2030 plan, along with its focus on structural reforms and investment in non-oil sectors, offers hope for a more diversified and resilient economy. The kingdom is investing in the future, but the road ahead will be challenging.
The key to Saudi Arabia’s success will be its ability to balance short-term fiscal challenges with long-term investments that foster sustainable growth.
Conclusion
Saudi Arabia’s decision to cut growth forecasts and raise deficit estimates underscores the economic challenges the kingdom is facing. With oil prices remaining subdued and global demand slowing, the kingdom must find new ways to generate revenue and sustain growth. The Vision 2030 plan, along with strategic investments in non-oil sectors, offers a path forward, but it will require careful management of public finances and continued economic diversification.
In the coming years, Saudi Arabia will need to navigate a delicate balance between spending to achieve its goals and ensuring fiscal stability. While the road ahead may be uncertain, the kingdom’s commitment to reform and investment in the future suggests that there is potential for a brighter, more diversified economic future.
