COVID-19, low oil prices to bring down Saudi fiscal revenues by 30%

Dubai: Saudi Arabia’s fiscal revenues are projected to decline by 25 to 30 per cent or about 8 per cent of the GDP this year, impacting its economic growth outlook, fiscal and extenal positions and the overall government debts, according to rating agency Moody’s.

Accoriding to the rating agency, despite an increase in the share of non-oil fiscal revenues in the last four years, the sovereign still relies heavily on crude oil and condensate sales for both fiscal revenue and foreign-currency receipts impacting the country’s growth outlook.

GDP growth

The International Monetary Funds’ (IMF) latest World Economic Outlook report has forecast Saudi Arabia’s real GDP growth at -2.3 per cent in 2020, with non-oil GDP contracting by 4 per cent.The IMF has forecast a rebound in GDP to 2.9 per cent in 2021.

Moody’s has a relatively rosier forecast on Saudi Arabai’s GDP outlook.

“If the new (Opec+) accord holds and Saudi Arabia implements production cuts exactly as agreed, we estimate that oil production will drop by 3.8 per cent in 2020 and overall real GDP will contract by around 1.5 per cent before rebounding in 2021 on the back of higher crude oil output as well as the non-oil sector recovery,” the rating agency said.

Moody’s analysts expect the impact of economic slowdown in the Kingdom will be somewhat moderated by conservatives assumption on tax revenue in 2020 budget.

Disruptions to business and consumer activity stemming from the measures implemented to suppress the spread of the coronavirus pandemic combined with the government’s commitment to reduce spending in response to lower oil revenues will lead to economic contraction in the non-oil sector.

Fiscal deficit

Moody’s fiscal deficit projections assume that the oil price decline will more than offset both the temporary increase in Saudi Arabia’s crude oil production in April and additional expenditure cuts that it expects the government to implement on top of those already planned in the 2020 budget and the current version of the Fiscal Balance Programme.

“Based on our new oil price assumptions of $40-$45 per barrel in 2020, we estimate that fiscal revenue will decline by 25 to 30 per cent (or almost 8 per cent of GDP). Taking into account some offsetting measures, we now project the deficit to more than double, to nearly 10 per cent of GDP in 2020 from 4.5 per cent of GDP in 2019,” said Alexander Perjessy VP-Senior Analyst at Moody’s

External position

The rating agency expects lower oil prices to reduce Saudi Arabia’s exports and weaken its current account position.

“We expect the current account to shift to a deficit of 3 per cent of GDP in 2020 (from a 6.3 per cent surplus in 2019) before returning to surplus in 2021, and foreign-currency reserves to erode by around $80 billion (11 per cent of GDP) in 2020-21,” said Perjessy.

Higher debts

The rating agency sees higher fiscal deficits in 2020 and 2021 pushing up government debt levels above what we previously expected. Anticipating larger-than planned debt accumulation, the government has raised its debt ceiling to 50 per cent of GDP from the 30 per cent of GDP that the Royal Court originally approved in 2016 as part of the Fiscal Balance Programme (FBP) initiative.

“We expect debt to rise to around 30-35 per cent of GDP in the next couple of years, reflecting the wider deficits but also the government’s plans to continue tapping into the fiscal reserves at the central bank, which will reduce the borrowing need,” Perjessy.