What to expect in Saudi Arabia’s next budget?

How Aramco’s record initial public offering will affect the world’s biggest oil exporter in 2020 is the biggest question hanging over Saudi Arabia’s annual budget ahead of Monday’s presentation.

While the government is tightening its purse strings to balance the books by 2023, the proceeds from Aramco’s IPO of almost $26bn could be used to soften the blow to the biggest Arab economy. In 2017, Crown Prince Mohammed bin Salman said at least half of the cash will be deployed at home by the Public Investment Fund.

Whether that spending will be earmarked for 2020 or spread over several years is something Finance Minister Mohammed Al Jadaan may clarify at a news conference after King Salman approves the budget this afternoon. The extent of Friday’s decision to cut oil output deeper next year is another issue that could affect the ministry’s economic projections.

“The government could withdraw part of the spending but the PIF, the sovereign wealth fund, could increase spending to offset that government retrenchment,” said Ziad Daoud, chief Middle East economist at Bloomberg Economics. “In that context it’s important to think about the quality of spending.”

Here are the key issues to look out for in Monday’s announcement:

Growth Projections
The pre-budget figures announced in October see economic growth accelerating to 2.3 per cent from 0.9 per cent in 2019. The forecast was most likely based on an assumption that OPEC members and other major crude producers will not extend cuts into 2020.

But a drive to bolster oil prices and increase Aramco’s valuation to $2 trillion prompted Saudi Arabia to steer other members of the Organization of Petroleum Exporting Countries to slash output. Given the economy’s overall reliance on oil, growth will most likely be revised down.

Less spending?
While the IPO will unlikely be the game-changer for the $780bn economy that the crown prince first envisioned, the money could allow the government to allocate less to capital spending than previously planned.

But it also raises a question about the relevance of central government projections if transfers from state-owned institutions can shift the country’s overall fiscal stance. The Finance Ministry said in October that next year’s budget shortfall will widen to 6.5 per cent of gross domestic product from 4.8 per cent in 2019.

Royal handouts
Last year, King Salman renewed cost of living allowances for Saudi citizens, first announced in 2018, to help those hurt by fuel price increases and the introduction of value-added taxation. Officials at the time said the measures would cost the government more than 50bn riyals ($13.3bn).

Last year’s announcement came through a royal decree shortly before the budget’s approval.

“We don’t expect them to be removed now, we expect them to be continued,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “I don’t think wage spending will come down from those levels. I think they’ll probably be absorbed.”

Energy subsidies
Reducing energy subsidies has been another key part of the crown prince’s reform agenda, but the plan has stalled. Renewing the handout package may mean that the government decides to push ahead with its plan to gradually phase out energy subsidies.

“This year, there were no subsidy changes,” Malik said. “Subsidy reforms and the ability to reduce current spending will be critical to show fiscal reform going forward.”