Saudi Budget 2021 Commentary: What will the budget’s break-even oil price be?

HONG KONG: Saudi Arabia’s 2021 budget released this week is in line with October’s pre-budget statement, which was reflected in our decision to affirm its sovereign rating at A and revise the outlook to negative on Nov. 9.

We expect a fiscal deficit of about 8 percent of gross domestic product (GDP) in 2021, wider than the budget’s 5 percent of GDP target. We assess that achieving the government’s target would at least partly be dependent on more supportive oil prices and production than we expect or continued exceptional revenue from government investments and asset sales.

The government is also likely to face pressure to maintain spending to support the economic recovery and the welfare of Saudi citizens, which could make the planned spending cuts difficult to implement.

We assume that oil prices will average $45 per barrel in 2021 and that Saudi crude production will average about 9.3 million barrels per day (bpd), slightly above Saudi Arabia’s commitment under the OPEC+ deal from in effect January, which could be re-assessed later in 2021.

However, further waves of the coronavirus disease (COVID-19) or slower-than-expected vaccine rollout, either in Saudi Arabia or elsewhere, and continued oil market weakness could upend these forecasts.

We estimate that $10 per barrel lower average oil prices would lead to an increase of 4 percent of GDP in the fiscal deficit relative to our forecast, while a 1 million bpd decline in production would lead to an increase of 2 percent of GDP in the fiscal deficit. We estimate Saudi Arabia’s fiscal break-even Brent oil price at an average of $67 per barrel in 2020-2022.

Krisjanis Krustins is director of the Sovereign team at Fitch Ratings.