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Upgrade to Premium Saudi Arabia Cuts Spending to Reform Economy Amid Lower Oil Abeer Abu Omar and Matthew Martin Tue, Nov 26, 2024, 10:02 AM 2 min read
(Bloomberg) — Saudi Arabia outlined plans to trim spending in 2025 after overshooting targets this year in an effort to progress a trillion-dollar economic transformation plan.
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Expenditure will fall to 1.285 trillion riyals ($342 billion), the Finance Ministry said on Tuesday, as the kingdom adjusts to a recent fall in oil prices. The government is forecasting a budget deficit in 2025 of 101 billion riyals, in line with projections made last month.
Spending in 2024 came in at 7.5% higher than the approved budget for the year, while revenues were 4.9% ahead of the estimates from a year earlier.
The government is “looking to use all the fiscal space to support the diversification program,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC. “Overall spending is still high, despite the modest pull back.”
Saudi Arabia has taken on massive investment and spending commitments to fund Crown Prince Mohammed bin Salman’s Vision 2030 agenda to diversify the economy away from oil. The country has started to scale back some projects, in part because oil prices remain far below what’s needed to balance the budget.
The kingdom’s finances have the resilience to withstand a decline in the level of crude, Finance Minister Mohammed Al-Jadaan told reporters.
“The Saudi economy has reached a stage where oil market volatility doesn’t impact it as much as it used to,” he said. The difference now, he said, is that spending forecasts are helped by revenues from oil.
Cuts to the budget of developments such as Neom, a planned new megacity on the Red Sea coast, come under the auspices of the Public Investment Fund rather than the government, according to Al-Jaadan.
“There is not a single project under Vision 2030 that doesn’t have the right funding,” he said.
Oil Lag
Even so, Saudi Arabia, one of the world’s largest oil exporters, relies heavily on crude prices to sustain economic momentum. The kingdom needs Brent at over $98 a barrel to reach equilibrium in its finances, according to the International Monetary Fund’s latest forecasts. Bloomberg Economics puts the so-called breakeven at $106, once domestic spending by the Saudi sovereign wealth fund is taken into account.
Brent crude has slumped almost 15% since the end of June, and traded at about $73 a barrel on Tuesday.
Economic growth this year is expected to be 0.8%, rising to 4.6% in 2025, according to the budget.
Saudi Arabia cut its growth forecasts for the next few years and projected deeper budget deficits than previously estimated in preliminary forecasts for revenue and spending published last month. Still, growth of about 4% over the next few years would still outpace most other major economies.
(Updates with economist comment in third paragraph.)
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