Saudi Arabia's budget reflects its massive growth potential despite global uncertainty

As part of the Kingdom's Vision 2030 goals, the government continues to work towards developing and diversifying the Saudi economy, raising economic growth rates and maintaining financial sustainability.

This includes launching several initiatives and strategies aimed at growing promising economic sectors, attracting investments, stimulating industries, raising the percentage of local content and non-oil exports, and boosting the tourism and entertainment sectors.

This falls within the vital remit of the Public Investment Fund (PIF) and development funds, which support the growth of non-oil activities at sustained and high rates in the medium term.

Outstanding performance

The Saudi economy's positive outlook for 2024 reflects its outstanding performance since the beginning of 2021.

Medium-term estimates for the 2024 economic growth rate have been revised; they forecast a 4.4% real GDP growth, backed by the rise in non-oil sectors' share in GDP.

The private sector is expected to continue to lead economic growth and create more jobs in the labour market. This is in addition to improving the trade balance and implementing other sectoral and regional strategies.

Read more: IMF crowns Saudi Arabia as G20's fastest-growing economy

The Kingdom's economy has recovered remarkably and is expected to lead to positive revenue-related developments in the medium term.

Total revenues for 2024 are expected to reach approximately SAR 1.17tn ($312bn), which is only a slight decrease of 0.6% from the expected revenues in 2023. The government has conservatively calculated the oil and non-oil budget revenue estimates, factoring in any fluctuations in the local economy.

Numbers will rise to about SAR 1.25tn ($333bn) in 2026, with expectations of local and global economic growth in the medium term, which in turn will contribute to the stable growth of non-oil revenues.

The Saudi budget announcement comes as the government continues implementing initiatives and executing structural economic and financial reforms under Vision 2030.

Read more: Saudi Arabia's economy broadens as public spending powers reform

These reforms aim to develop fiscal policies that contribute to achieving a steadfast and viable state budget. Additionally, the government has adopted expansionary spending policies to support economic growth.

The 2024 budget is expected to record a deficit of about 1.9% of the GDP, with budget deficits expected to continue at similar levels in the medium term.

Biggest economic reforms

Saudi Arabia's package of economic and legislative reforms, implemented during the past five years, is the largest of any country in the world. It is expected to hold this status for the foreseeable future.

This has positively affected economic growth, encouraging the government to increase its annual budget.

These reforms have shielded the Kingdom from global economic headwinds in the past five years. At a time when the global investment climate is relatively weak, several reports point to promising investment opportunities in Saudi Arabia.

Reputable international reports – such as those of the IMF's Article IV Consultation and global rating agencies, as well as the Saudi economy's positive growth indicators – provide strong incentives for those considering investing in the Saudi economy.

These reports indicate that the Kingdom's economy currently stands as the most powerful and vital among the world's economies.

In addition, the government is sticking to its approved annual borrowing plan, which will fund the expected budget deficit and repay principal debts due in 2024.

Moreover, it is actively exploring other financing opportunities based on market conditions, to repay debts due in the coming years and finance key strategic projects.

The government is looking into alternative financing options to promote economic growth, such as financing capital projects and infrastructure. The government plans to maintain and deepen market efficiency by diversifying its financing tools.

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Preliminary forecasts indicate that the inflation rate for 2023 may rise by about 2.6%, but inflation rates are estimated to remain at satisfactory levels in the medium term.

This is thanks to proactive measures and policies undertaken by the government to control rising costs, cap petrol prices, and ensure abundant food stocks – as well as support social security programs.

Global economic growth

In its July 2023 update to the World Economic Outlook, the IMF predicted a slowdown in global economic growth, which is expected to reach about 3% in 2023 and 2024, compared to 3.5% in 2022.

Growth in emerging markets and developing economies is projected to stabilise at 4% and 4.1% for 2023 and 2024, respectively, compared to 4% in 2022.

However, these probabilities didn't impact Saudi Arabia's 2024 budget estimates.

The Kingdom did not underestimate oil prices and national growth rates. On the contrary, the budget – in terms of expected revenue and estimated spending – stood strong in the face of challenges that confront today's global economy.

This comes down to three key factors:

• Saudi Arabia is working on all fronts to achieve the goals of Vision 2030 and is even preparing to announce, in 2027 and 2028, a new national strategy for 2040. This means that the government can continue to spend large without putting in place any austerity policies that may strip the economy of many of the gains it has achieved in recent years.

• OPEC+ countries, led by Saudi Arabia, work towards maintaining balance in the oil markets. This policy is crucial in preventing sharp fluctuations, which could negatively impact the growth of oil-producing countries' economies and their governments' ability to spend domestically. It is a strategic decision of utmost importance.

• Saudi Arabia maintains a strong financial position. The Kingdom has one of the lowest public debt rates in the world, relative to the size of its economy. This is crucial and allows the government to continue to spend generously and increase development rates.

Delving into oil

Looking at the oil market, the average prices of Brent crude futures fell between the beginning of the year and August by 22.2% to an average price of about $80.8 per barrel, compared to $103.8 per barrel during the same period last year. Prices rose in September to more than $95 per barrel.

This year's fluctuation in average oil prices can be attributed to slower global growth resulting from high inflation, higher interest rates, and the ongoing geopolitical crisis between Russia and Ukraine.

The Kingdom and OPEC+ countries have voluntarily reduced oil supplies to support the stability of oil markets and improve precautionary efforts.

The average supply of the Kingdom from the beginning of the year until the end of August decreased by 5.22% to reach about 9.96mn barrels per day (bpd), a decrease of 548,000 bpd.

The Kingdom announced a voluntary reduction of 500,000 bpd from the beginning of May until the end of 2023. The deadline was later extended to the end of 2024. The Kingdom announced an additional voluntary reduction of 1 million bpd starting in July 2023 and then extended the deadline until the end of the year.

OPEC estimated the total growth of global oil demand for 2023 at 2.4% compared to last year, bringing global oil demand to about 102.1 million bpd. Demand is estimated to rise by 2.2% in 2024 compared to 2023, amounting to 104.3 million bpd. 

Local economic developments

Despite the forecasted slowdown in global economic growth in 2023, and uncertainties arising from current geopolitical tensions, inflation-related pressures, high interest rates, and a growing risk of recessions in several major economies, the strength and durability of the Kingdom's economy enabled it to persevere.

The Kingdom achieved a growth rate of 2.5% in the first half of 2023. This was mainly driven by an increase in the share of non-oil activities in the GDP, which rose to 5.7% as expected. Growth rates were sustained in various non-oil economic activities during the year's second half.

Manufacturing activity is expected to flourish. The index of industrial production averaged about 1% year-to-date up until July. This was fuelled by about 569 factories that started production between the beginning of this year and July, with a total investment of SAR 16.3bn ($4.34bn).

The gross fixed capital formation by non-governmental entities during the first half of 2023 grew at an annual rate of 8.5%. In the first quarter, foreign direct investment witnessed a year-on-year growth rate of 10.2%.

The investment deals completed during the first half of 2023 amounted to about 104, which reflected a growth of about 3% compared to the same period last year. This growth will reflect positively on the local economy.

The economic reforms contributed to improving labour market indicators, in line with the goals of Vision 2030.

The unemployment rate for Saudis, which was 8.3% during the second quarter of 2023, is one of the lowest in more than 20 years.

This was a result of several initiatives such as Saudisation and support of the private sector, which boosted the percentage of local content in national industrial development and logistics projects.

In addition to this, national exports were stimulated, privatisation programmes worked to create labour market opportunities for citizens, and the Women's Empowerment Initiative helped women's participation in the labour market reach 35.3% during the second quarter of this year, which exceeded the 30% goal of Vision 2030.

All this clearly shows improvements in the Kingdom, particularly considering the growth levels of the Saudi economy driven by non-oil sectors.

Ready for risks

Analysing the financial and economic risks facing the Kingdom's economy is a vital part of understanding its current situation and its main challenges.

The bigger picture will help with implementing effective policies and strategies to deal with risks head-on and achieve financial sustainability.

As global inflation rates begin to decrease and domestic inflation rates remain stable, the likelihood of declining domestic demand is considered low.

Furthermore, ongoing initiatives to strengthen the private sector are expected to impact consumption, investment, employment and Saudisation rates positively. The private sector's contribution to the GDP already reached around 41% in 2022, and the Kingdom is looking to increase this contribution to 65% as part of its Vision 2030 plan.

Finally, the government has adopted several measures and policies to mitigate risks, including setting a ceiling on petrol prices, enhancing food security, strengthening the social support and subsidies system, subsidising essential goods and services, and strengthening and developing the non-oil sector.

In addition, a high- and low-revenue scenario has been developed, accounting for the challenges facing the global economy and geopolitical risks.

The estimates signal the government's readiness to deal with these circumstances and build a flexible fiscal margin. Reliance on structural revenue estimates also reduces spending in line with oil market fluctuations.