Given the recent 2021 quarterly Saudi budget and positive full-year forecasts, expectations were raised before the 2022 Saudi budget was released on Sunday.
Pre-budget analyst forecasts focused on whether there would be a small budget surplus in 2022, or a smaller deficit in line with the recent quarterly trends, with continued spending rationalization.
Analysts were not to be disappointed as there was something to make everyone happy. The 2022 budget set out total expenditures of SR955 billion ($255 billion), revenues of SR1.045 trillion, and a forecast surplus of SR90 billion, which is somewhat higher than some analysts had predicted.
The budget surplus is expected to be around 2.5 percent of the gross domestic product, compared with a budget deficit of SR85 billion for 2021 or -2.7 percent of the GDP. Overall national debt would remain at SR938 billion and continue at this level to 2024. Inflation, which is looming in many countries, is predicted to come down to 1.3 percent in 2022, compared to a FY 2021 rise of 3.3 percent, with the ministry forecasting that inflation would be in control over the next two years at around 2 percent for 2023/24 due a normal domestic economic growth and activity.
The 2021 budget set out some key pillars to achieve the above as guiding posts going forward. The first pillar of the 2022 budget is that it has been structured to support the continuous enhancement of fiscal sustainability, the second is the commitment to continue the rollout of economic and structural reforms to enhance economic growth which is forecast to reach around 7.4 percent in terms of the real GDP in 2022, with nominal GDP estimated to reach SR3.6 billion in 2022 compared with SR3.2 billion in 2021; and the third pillar is strengthening the Kingdom’s fiscal position to deal with internal COVID-related and external shocks, especially in oil price volatility. Achieving these three pillars would focus on diversification of revenue sources and expenditure efficiency measures for the first pillar; enabling the private sector’s participation and raising the sector’s productivity and contribution to the national economy with the investment of the Public Investment Fund and the National Development Fund, as well as an invigorated privatization program. For the third pillar, it is important to broaden the ongoing structural reforms with economic and social dimensions to keep pace with a changing global landscape.
Once again, there has been more clarity and transparency on the why and how in the underpinning of the Saudi budget data as well as setting out various revenue scenarios, something that previous budget forecasts lacked.
The Ministry of Finance sets out three such revenue scenarios, while holding total expenditures constant at SR955 billion. In the first scenario, the overall deficit is set at SR52 billion based on a structural revenues scenario which is not tied to developments in the global markets in contrast with the 2022 budget surplus forecast of SR90 billion which is the baseline scenario based on developments in the global markets, and decreasing to SR36 billion based on lowest revenue estimates compared to the baseline scenario and a larger surplus of SR175 billion based on the highest total revenue estimates.
In setting out these revenue scenarios, the ministry is sending out a signal that while it hopes for the best, it is also prepared for worst-case scenarios, which will ensure further tweaking in relaxing or tightening some of the three pillars operational tools at hand. Flexibility in managing the budget on a rolling quarterly basis and adjusting to external shocks becomes the keyword.
The 2022 budget is seemingly more relaxed about the size and management of the national debt level which is expected to remain at SR938 billion in 2022, but representing around 25.9 percent of the GDP for the year compared with 29.2 percent of GDP in 2021. Debt composition would remain at around 60 percent in domestic debt and 40 percent external despite very strong appetite and competitive pricing for the recent Saudi external debt offerings, which were oversubscribed many times over by international investors. As a further sign of foreign investors' confidence in the Saudi economy, the ministry’s budget statement highlighted the exceptional progress made in both inward FDI flows as well as increased foreign participation in the Saudi capital market ownership. According to the latest data, the FDI flows reached SR58.6 billion in H1 2021 compared with SR9.1 billion in the previous year, the highest such inflow recorded in recent years, while foreign ownership in the Saudi stock market rose to around 14.5 percent in Q3 2021, up from 12.5 percent in the previous period. Government reserves with SAMA are predicted to rise to SR381 billion in 2022, compared with SR350 billion in 2021 due to higher oil revenues and non-oil revenues, with the rate of VAT still set at 15 percent in 2022.
In summary, it has been another remarkable year of navigating the pandemic and its many manifestations, as well as standing fast on OPEC+ production commitments going forward all underpinned by continuing fiscal efficiency measures while opening up the economy to private and international investors. All this augurs well to meeting the 2022 budget aspirations and even exceeding them.
• Dr. Mohamed Ramady is a former senior banker and professor of finance and economics, King Fahd University of Petroleum and Minerals, Dhahran.
