Saudi Arabia’s breakeven oil price to dip amid lower spending, says IMF

Saudi Arabia’s breakeven oil price in 2020 is expected to be lower than $83.6/b to balance its budget, as the world’s biggest oil exporter signals an end to the expansionary fiscal policy through spending cuts, an International Monetary Fund official told S&P Global Platts.

“The breakeven oil prices for 2020 of $83.6/b [as per the October regional report] is expected to be lower,” said Tim Callen, Saudi Arabia mission chief to the IMF, in an interview on December 19.

In its October regional report, the latest published by the IMF, the international organization had forecast a breakeven oil price of $86.5/b for 2019 and $83.6/b for 2020.

At around 0813 GMT, Brent oil prices were up 0.2% from Friday’s settle at $68.29/b.

Saudi Arabia needs high oil prices to help balance its budget as the biggest Arab economy seeks to create jobs, use oil money to prop up the private sector, and maintain its foreign oil reserves.

Since 2015, when the fiscal deficit reached a record Riyals 367 billion ($98 billion), the government had dipped into its reserves and tapped domestic and international debt markets to finance its budgets.

Saudi Arabia, however, is now forecasting its 2020 expenditure to decline 2.6% to Riyals 1.02 trillion ($272 billion) following a record Riyals 1.048 trillion budget for 2019 aimed at boosting growth. Due to Saudi Arabia’s adherence to oil production cuts as part of the Opec+ agreement, that will kick in January till end of March, it is forecasting oil revenue to decline 14.8% to Riyals 513 billion in 2020 from 2019.

“We were urging the government to control spending going forward, so I think this [2020] budget has moved in the direction we had hoped and recommended,” said Callen. “But, of course, there is still the challenge of delivery on the budget and certainly the spending path is ambitious. I think it’s achievable but will need strong implementation of policy to achieve that going forward.”

OPEC+
The Opec/non-Opec alliance, led by Saudi Arabia and Russia, agreed earlier in December to deepen their oil cuts to 1.7 million b/d from the current 1.2 million b/d until the end of March amid concern of oversupply in the first quarter of next year.

The deal includes a surprise additional voluntary cut of 400,000 b/d by Saudi Arabia, which means the alliance will trim its production by 2.1 million b/d through to March.

Callen said the impact of the agreement on the Saudi economy will be determined by the course of events after the end of March.

“At this stage, we will have to see what the production decision is for the rest of the year,” he said.

Nonetheless, the IMF expects non-oil growth to fuel the economy in 2020 despite a drop in government spending, which had been the main catalyst for growth in previous years.

“On the non-oil side, growth seems to be evolving pretty much as we expected,” said Callen. “Confidence in the economy seems to be better now than a few years ago and we would expect private sector momentum to be there even if government spending slows.”

Economic growth forecasts for Saudi Arabia will be revised in January as part of the IMF’s World Economic Outlook Update, he added. Saudi economic growth for 2020 is forecast to reach 2.2% in 2020, according to the IMF’s October regional report.

VISION 2030
Saudi Arabia wants to wean itself off oil income to propel private sector growth and has adopted Vision 2030, a roadmap for incentivizing non-oil growth.

Vision 2030, the brainchild of Crown Prince Mohammed bin Salman that was revealed in 2016, envisages everything from increasing the number of tourists to boosting private sector contribution to the GDP.

Callen said implementation of the Vision continues to progress, but priorities need to be established to ensure its success.

“One of the messages we have consistently given is the importance to prioritize the reforms. It is hard to do everything in one go,” said Callen.

According to Callen, there are three priorities for the government: First is to eliminate the fiscal deficit, second is to continue to improve the business environment and attractiveness of country to domestic and foreign investors, and thirdly, to implement reforms that will encourage young Saudis to work in the private sector.

ARAMCO IPO
Selling a stake in Saudi Aramco, the world’s biggest oil producing company, is part of that vision and proceeds from the 1.5% domestic stake sale that took place in December in the world’s biggest initial public offering is expected to be funneled back into the local economy.

The Public Investment Fund, the country sovereign wealth fund, is expected to invest the proceeds of the IPO, which raised $25.6 billion beating the previous record held by Chinese e-commerce giant Alibaba’s $25 billion flotation in 2014.

“Money that is being raised by the IPO clearly gives the authorities opportunities for investing either domestically to help develop some of the sectors there they are looking to develop as part of Vision 2030 initiatives or internationally in assets to provide a return and revenues for the government,” said Callen.
Source: Platts