BofA cites oil price as risk to Saudi growth, budget deficit

Bank of America analysts provided insights into Saudi Arabia’s economic outlook, highlighting the potential risks and growth prospects in the face of fluctuating oil prices. According to BofA, Saudi Arabia’s real GDP growth is projected to stabilize around 3.4% in 2025.

This forecast is based on the expectation that the Organization of the Petroleum Exporting Countries (OPEC) will gradually reintroduce supply to the market, which could bolster hydrocarbon real GDP growth.

The analysts noted the strong momentum and funding for near-term megaprojects in Saudi Arabia, which could support non-hydrocarbon real GDP growth, provided that oil prices do not remain low for an extended period. These projects are seen as a buffer against the volatility of the oil market, potentially safeguarding the country’s economic diversification efforts.

Despite these growth prospects, BofA also pointed out the downside risks, particularly a widening budget deficit. The deficit is expected to reach 5.6% of GDP, equivalent to SAR 230 billion or approximately $61.5 billion, under BofA’s revised oil price forecast of $70 per barrel.

This widening reflects not only the oil price forecast but also the lower Performance-Linked Dividends (PLD) expected from Saudi Aramco (TADAWUL:2222) this year. The analysts believe that the deficit could be maintained at these levels assuming crude oil production remains flat, there is no overspending, and non-hydrocarbon revenues stay resilient.

The report also raises concerns over potential financing constraints that could emerge for Saudi Arabia. In such a scenario, BofA anticipates that authorities might rely on domestic private placements to mitigate pressure on market yields. This strategy was previously employed during the pandemic in 2020 when Saudi Arabia raised $30 billion through this method.

BofA’s forecasts come with a caveat, noting that they are subject to unusual uncertainty. This uncertainty is linked to the trajectory of Saudi crude oil production and the volatility of oil prices.

Additionally, the analysts underscored that counter-cyclical fiscal policy in Saudi Arabia may not be sustainable if structural changes occur in the oil market. They also mentioned that OPEC faces a delicate balancing act given the risks to global oil demand and the uncertain landscape of energy sanctions.

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