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���������ֳ�-Hong Kong-07 September 2023: A performance dividend introduced by the Saudi Arabian Oil Company (Aramco, A+/Stable) will create additional fiscal space for the sovereign, but the dividend’s overall effect will also depend on how the government adjusts spending in response, says ���������ֳ�. We believe the budget could become less resilient to oil price shocks if government revenue and spending become more reliant on the performance dividend.

The dividend payments that will begin in 3Q23 will more than offset the effects of higher-than-expected spending over 1H23. The performance-related element, of USD9.9 billion (around 1% of GDP), coupled with the regular dividend will bring the total quarterly dividend to around USD29.4 billion (2.8% of GDP), 90% of which will go to the government budget and 8% to the Public Investment Fund (PIF).

Spending in 1H23 has been about 8% above budget. We expect it to be around 6% above budget over the full year, against our earlier June projection of 3.5%. Overall revenue in 1H23 was also slightly higher than budgeted, helped by a 11% rise in non-oil revenues that partly reflects the boost to income tax from the economy’s strong performance in 2022. Tax revenue from goods and services, including VAT, was broadly in line with the budget. Significantly lower oil prices than in 2022, alongside a 4% reduction in crude output, caused a 17% decline in oil revenue, but prices remain at healthy levels for the budget.



We project that the budget deficit will be equivalent to about 1.3% of GDP in 2023 with the revenue boost from the performance dividend (1.7% of GDP), compared with our forecast from June 2023 of 2.3% and a median of 4% for ‘A’ category sovereigns. Government deposits at the Saudi Central Bank were stable in 1H23 as debt issuance was sufficient to cover government financing needs, including large debt maturities.

The budget could return to surplus in 2024, considering Aramco’s guidance that performance dividends will be paid quarterly until at least 4Q24 and our current assumption that Brent oil prices will average USD75/barrel (bbl). The performance dividend would contribute around 3.3% of GDP in extra revenue in 2024.

This increases the share of oil revenue in total revenue, but could help lower the fiscal break-even oil price to around USD75/bbl, from around USD85/bbl previously, depending on oil production and budget spending trends. We projected that the break-even would fall to USD76/bbl in 2025 when we upgraded Saudi Arabia’s rating to ‘A+’, with a Stable Outlook, from ‘A’, in April 2023. This did not take the performance dividend into account but factored in lower spending.

Prospects for a fiscal surplus will depend on the government’s response to the fiscal space created by the additional revenue from Aramco. The 2023 budget projected a 1% rise in spending in 2024. We viewed this as credible, given the potential for budgeted capex to decline as the PIF undertakes more investment outside the budget, and as growth in wages, subsidies and transfers may be modest.

However, the government’s two-month extension of benefits under the citizens account policy, to September 2023, highlights the risk that spending on subsidies and benefits could be higher than we expected. Officials could also deploy additional revenue as on-budget capex to accelerate Vision 2030 projects, even while the PIF increases investments.

Aramco has said that from 2025, it will announce performance dividends for the year ahead alongside its 2024 results, but adjustments to the company’s dividend policy may still complicate projections of the sovereign’s fiscal performance. The government's dividend revenue in the budget would also fall if it opts to sell further stakes in Aramco.


Contacts:

Toby Iles
Head of Middle East and Africa Sovereigns
+852 2263 9832
���������ֳ� (Hong Kong) Limited
19/F Man Yee Building
68 Des Voeux Road Central, Hong Kong

Duncan Innes-Ker
Senior Director, ���������ֳ� Wire
+852 2263 9993





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