Saudi Arabia will need oil prices to average more than $90 a barrel this year to balance its budget, according to Fitch Ratings, which affirmed the kingdom at the fifth-highest investment grade but warned about its heavy reliance on energy.
The government’s fiscal break-even price “has risen in recent years and we forecast it will remain above $90 per barrel in 2024 before falling to $85 per barrel in 2025”, Fitch analysts said in a report on Monday.
Saudi Arabia’s dependence on energy prices remains a weakness to its overall creditworthiness, they said. Still, the company left the sovereign rating at A+, keeping its outlook stable.
Fitch’s break-even estimate is far higher than the International Monetary Fund’s forecast of slightly less than $80 for this year, according to its October regional outlook. If counting domestic spending by the kingdom’s wealth fund, Saudi Arabia requires oil at $108, according to Bloomberg Economics.
The assessment explains why the world’s largest oil exporter is having to maintain curbs on its crude output, an approach that has sacrificed sales volumes for what has so far been a minimal reward in terms of higher prices.
Saudi Arabia and its Opec+ allies including Russia have agreed on aggregate output cuts of 2.2 billion barrels per day (bpd) until March 31, and possibly beyond, in order to support prices. Riyadh’s share of those cuts is 1 million bpd.
The price of the global benchmark Brent crude has not been at $90 since last October and was trading at just over $77 in London on Monday.
Saudi Arabia’s lower oil production has come at a cost to its economy, which suffered a rare contraction in 2023 — according to official estimates — shrinking 0.9% in its first full-year drop since the pandemic.
According to Fitch, a swing of $10 a barrel in crude prices would affect its budget projections for Saudi Arabia by 2% to 2.5% of gross domestic product. A change in oil output by 500,000 bpd affects the kingdom’s fiscal balance by about 1% of GDP, the rating company said.
“We forecast reserves to decline to an average of $420 billion in 2024-25, as the current account surplus narrows on the assumption of lower oil revenue,” Fitch analysts said. Investments by large institutions such as the Public Investment Fund and pension funds are likely to moderate, they added.
Saudi Arabia is on track to run budget deficits every year through 2026, following the first surplus in nearly a decade in 2022, as it ramps up spending.
Non-oil economic growth is seen at 4.5% over 2024-25, supported by public-sector investment, reforms and lower interest rates, Fitch said.
Spending is expected to be 3.5% above what is targeted in this year’s budget at nearly $347 billion while revenue is seen as higher on the back of performance-related dividends from Saudi Aramco.