Saudi budget to need over $100 oil price

Prices must average $321 in 2030 to achieve budget balance

Saudi Arabia needs an oil price of more than $100 within the next six years to prevent a deficit in its budget while the breakeven price of its crude could reach as high as $321 a barrel by 2030, a local study has said.

The surge in the breakeven price of the Gulf Kingdom’s crude will be a result of a steady decline in its oil exports, a sharp rise in public spending and the absence of other major sources of income, the Riyadh-based Jadwa Investments said.

Since oil prices are unlikely to reach that level in the long term, the country’s budget could suffer from a massive deficit which can be financed through its foreign assets before it turns to the market for borrowing, it said.

Jadwa projected Saudi Arabia’s total revenue to rise from around SR735 billion in 20010 to SR843 billion in 2015 and peak at SR1,120 billion in 2030.

But it expected expenditure to race far quicker than revenue as it will surge from around SR637 billion in 2010 to SR893 billion in 2015 and 2,453 billion in 2030.

The expected sharp rise in the fiscal deficit could push Saudi Arabia’s foreign assets from a record high of SR1,985 billion in 2015 to SR1,331 billion in 2020 and only around SR375 billion in 2030.

Jadwa said the fall would force the Kingdom to borrow to balance its budget and this would push its public debt back to new peaks after it plunged to one of its lowest levels of SR167 billion in 2010. It forecast the debt to remain unchanged until 2020 before it rockets to an all time high of SR5,889 billion in 2030.

“Based on the above assumptions, we estimate that the breakeven oil price required to balance actual government revenue with actual government expenditure will not rise above $100 per barrel (for Saudi export crude) until 2017 and will stay below $120 per barrel until 2021,” the study said.

“Since prices seem likely to be close to this area for the period, it appears that Saudi Arabia has about a decade where it will only need to run relatively small budget deficits that would not dent foreign assets too greatly…..beyond that, however, the breakeven price begins to rise rapidly.”

The report showed that by 2025 Saudi Arabia would need $175 per barrel to balance actual revenues to expenditures, and by 2030 the breakeven price would reach in excess of $320 per barrel.

By then oil export volumes would be around 1.5 million barrels per day lower than domestic oil consumption, it said.

“We think it very unlikely that oil prices would reach these levels even after 20 years. Our assumption is that oil prices ease slightly over the next few years before rising gradually with inflation from $90 per barrel for Saudi export crude in 2014. As a result, we expect that the budget will fall into deficit in 2014 and will not return to a surplus through 2030,” it said.

“However, drawing down the huge stock of foreign reserves the government has built will ensure that the deficit can be financed comfortably for many years before the government would need to turn to the debt markets……..based on past patterns, we expect that the Saudi government would fund deficits first by drawing down foreign assets, then by issuing domestic debt, and only in a last resort turning to foreign borrowing.”

Jadwa said likely budget surpluses over the next few years would be used to increase foreign assets and future deficits would be financed by drawing down assets until they reach about $100 billion. “After this point, we assume the entire deficit would be financed by the new issuance of domestic debt.”

With a budget surplus expected for this year and the following two years, SAMA net foreign assets are likely to rise to over SRtwo trillion($533 billion) by the end of 2013 as oil prices are expected to remain high.

“Even if all subsequent budget deficits are fully financed by drawing down these assets, they will still stand at over SR1 trillion ($267 billion) at the end of 2021. On our projected fiscal path, net foreign assets would drop to $100 billion in 2024, after which new debt would be used to finance the deficit,” Jadwa said.

“With large budget deficits coming in the second half of the 2020s, the stock of domestic debt would rise quickly, as would the cost of servicing the debt. By 2030 the fiscal position would be very strained….of course, the rapid worsening of government finances can be avoided if the trajectory of the current trends of oil production, domestic oil consumption and government spending are altered.”


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