KEY RATING DRIVERS
The Outlook revision reflects prospects for a smaller deterioration in key sovereign balance-sheet metrics than at the time of the previous review, owing to significantly higher oil prices and continued government commitment to fiscal consolidation. We continue to forecast government debt/GDP to rise and sovereign net foreign assets (SNFA) to decline over the medium term, but these metrics will remain considerably stronger than the 'A' median. In addition, the government will retain significant fiscal buffers, for example, deposits at the central bank in excess of 10% of GDP. Oil dependence, weak governance indicators and vulnerability to geopolitical shocks constrain the rating.
The widening of the 2020 budget deficit, to 11.2% of GDP, was less severe than during the 2015-2016 oil price slide owing to subsequent fiscal reforms, the policy response in 2020 and exceptional budget transfers from the Saudi Central Bank (SAMA) and the Public Investment Fund (PIF). The government tripled the VAT rate to 15% in July 2020, raised customs duties and reprioritised spending. Total spending was only 5% above budget because of capex reductions and the suspension of the cost of living allowance. Non-oil revenue rose to 18.5% of non-oil GDP (or 15.8%, excluding non-recurring items) from less than 10% in 2015.
We forecast the budget deficit to narrow to 3.3% of GDP in 2021, better than the 4.9% budget target. We assume the Brent price will average USD63/bbl, up 46% from 2020. A full year of the higher VAT rate will support non-oil revenue. Fiscal policy has tended to be procyclical with oil prices, but we expect budget spending to remain better anchored to budget plans in 2021 given the uncertain medium-term oil price outlook, the government's aim to improve the Kingdom's fiscal structure and increasing public-sector spending outside the budget. Higher oil prices in 2021 are nonetheless a test for reform momentum, including on the wage bill and subsidies. Planned reforms in these areas may well slow.
In 2022-2023, the government projects budget deficits of 3% of GDP and -0.4% of GDP, with lower nominal spending each year. Our forecasts are more conservative, with the budget deficit widening to an average of 3.6% of GDP as oil prices decline and assuming marginal nominal increases in spending which will nonetheless decline as a percentage of GDP.
The Outlook revision reflects prospects for a smaller deterioration in key sovereign balance-sheet metrics than at the time of the previous review, owing to significantly higher oil prices and continued government commitment to fiscal consolidation. We continue to forecast government debt/GDP to rise and sovereign net foreign assets (SNFA) to decline over the medium term, but these metrics will remain considerably stronger than the 'A' median. In addition, the government will retain significant fiscal buffers, for example, deposits at the central bank in excess of 10% of GDP. Oil dependence, weak governance indicators and vulnerability to geopolitical shocks constrain the rating.
The widening of the 2020 budget deficit, to 11.2% of GDP, was less severe than during the 2015-2016 oil price slide owing to subsequent fiscal reforms, the policy response in 2020 and exceptional budget transfers from the Saudi Central Bank (SAMA) and the Public Investment Fund (PIF). The government tripled the VAT rate to 15% in July 2020, raised customs duties and reprioritised spending. Total spending was only 5% above budget because of capex reductions and the suspension of the cost of living allowance. Non-oil revenue rose to 18.5% of non-oil GDP (or 15.8%, excluding non-recurring items) from less than 10% in 2015.
We forecast the budget deficit to narrow to 3.3% of GDP in 2021, better than the 4.9% budget target. We assume the Brent price will average USD63/bbl, up 46% from 2020. A full year of the higher VAT rate will support non-oil revenue. Fiscal policy has tended to be procyclical with oil prices, but we expect budget spending to remain better anchored to budget plans in 2021 given the uncertain medium-term oil price outlook, the government's aim to improve the Kingdom's fiscal structure and increasing public-sector spending outside the budget. Higher oil prices in 2021 are nonetheless a test for reform momentum, including on the wage bill and subsidies. Planned reforms in these areas may well slow.
In 2022-2023, the government projects budget deficits of 3% of GDP and -0.4% of GDP, with lower nominal spending each year. Our forecasts are more conservative, with the budget deficit widening to an average of 3.6% of GDP as oil prices decline and assuming marginal nominal increases in spending which will nonetheless decline as a percentage of GDP.
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