IMF Says Saudi Arabia Has Cut Spending Enough Even if Oil Slides

Saudi Arabia has cut spending enough this year and probably won’t need to make further fiscal adjustments even if crude oil prices weaken, according to the International Monetary Fund.

The kingdom said in late 2024 it would trim 2025 expenditure to 1.285tn riyals ($342bn) after previously overshooting on its targets in a bid to drive progress on its plans to diversify the economy.

While the government has made cuts, expenditures are likely to be higher than budgeted and some one-off spending will continue, according to Amine Mati, the IMF’s Saudi mission chief.

The Washington-based lender sees Saudi Arabia’s fiscal deficit rising to 4% this year, a level Mati describes as “quite appropriate” given the country’s adequate level of foreign reserves. The Saudi government’s own projection is for a shortfall of 2.3% this year.

“We don’t think any more action on spending cuts or fiscal adjustment are needed for this year,” even if oil prices fall to $60 a barrel, Mati said in an interview with Bloomberg. 

Global benchmark Brent is currently trading below $70 as the Organisation of the Petroleum Exporting Countries (Opec) hikes output, and many forecasters including Goldman Sachs Group Inc see a further slide toward $60 later in the year.

In a scenario where oil prices decline significantly and permanently, the IMF would recommend a “more aggressive fiscal consolidation strategy,” according to a report released yesterday.

The Middle East’s biggest economy is spending heavily on Crown Prince Mohammed bin Salman’s Vision 2030 strategy, which includes major infrastructure projects and an overarching goal of weaning the economy off its reliance on crude oil revenues. 

It has said it’s running deeper budget deficits by design as it seeks to progress that strategy and is borrowing heavily in the meantime to finance the shortfall.

Already this year, Saudi Arabia has sold almost $15bn of sovereign debt in dollars and euros. The IMF’s baseline scenario sees the kingdom continuing to take on debt, increasing the debt-to-GDP ratio to almost 41% by 2030, from below 30% now. That’d still be low by global standards.

The focus for Saudi Arabia going forward should be on reducing current expenditures that are deemed low priority and have a limited long-term fiscal multiplier, such as some spending on goods and services, the IMF said in its Article IV report.

“The view that we have on recalibration is to make sure that spending is efficient and is aligned with priority project and overheating, and not a recalibration that is done because oil prices are lower than initially thought,” Mati said.

More clarity is also needed for investors, especially those sitting abroad, after signs that some re-prioritisation in Saudi Arabia has happened, he added. “It’s very important to clearly communicate and explain to market and investors what are the new spending plans, and what projects are kept. This is a recommendation that we keep making.”

The IMF expects the Saudi economy to grow 3.6% this year, supported by the phase-out of Opec+ production cuts. Non-oil growth is seen converging toward 3.5% in the medium term as non-oil private investment steadily grows, including through contributions from the Public Investment Fund.

Mati said the PIF is expected to continue spending at least $40bn a year on some of the domestic investment and projects that are already part of Vision 2030. “This is going to help keep growth positive and robust compared to what’s happening elsewhere.”