Rating firm Moody’s now thinks that higher spending that becomes inflexible through oil price cycles may weaken Saudi Arabia’s currently strong balance sheet.
Moody’s forecasts assume that oil prices will average $80-$85 per barrel in 2023-24 and gradually decline toward $50-$70 per barrel over the next few years.
Oil production in the Kingdom is also expected to gradually increase over the coming years as a series of production cuts agreed with Organization of Petroleum Exporting Countries and other partners (together OPEC+) and on a voluntary basis since November 2022 are gradually unwound.
This has been revealed in Moody’s credit outlook published on September 5, 2023 which analysed Saudi’s 2024 pre-budget statement.
“Should oil prices or production fall substantially below our current assumptions, persistent and sizeable fiscal deficits would erode the government’s current balance sheet strength.
We assume that the government would rationalise spending if oil prices and production no longer supported higher capital expenditure. Its track record of fiscal adjustments includes cutting capital and operating expenditure significantly and tripling value-added tax to 15% in 2020,” said Moody’s.
Eroding Saudi’s current balance sheet strength could deal the Kenyan government a blow following an extension of the oil deal to December 2024. The deal was extended on September 20, 2023.
The head of Kenya’s Energy and Petroleum Regulatory Authority (EPRA) said Kenya extended to December 2024 an oil supply deal with three Gulf-based companies.
“There was an extension up to December 2024, so this is basically arising out of negotiations that have been happening to drive down the freight and the premium (costs),” said Daniel Kiptoo, the head of EPRA.
The deal had helped lower the cost of transporting oil to Kenya and the premium it pays to suppliers.
Saudi’s pre-budget statement shows that estimated expenditures for this year exceed 2023 budgeted expenditures by 13%, and are up 8% from 2022 actual expenditures. The government expects expenditures to be largely unchanged in 2024 compared to its latest 2023 estimate, and to increase by 4%-5% annually in 2025-26.
Based on the government’s spending projections, the kingdom would likely run an average fiscal deficit of around 2% of Gross Domestic Product (GDP) in 2023-24 and 3.5% in 2025-26, compared to a fiscal surplus of 2.5% in 2022.