Saudi Arabia takes conservative view on oil prices for 2023 budget

By Edward Bell

Saudi Arabia’s finance ministry published its preliminary budget statement for 2023 at the end of last week, indicating a fractional surplus of just SAR 9bn next year (0.2% of GDP), much lower than its prior estimate of SAR 27bn and our own forecast of SAR 330bn. The main difference is due to revenue assumptions: the finance ministry has likely based projected revenues on a conservative oil price assumption of around USD 80/b, which is much lower than our forecast of an average of USD 105/b in 2023. The government forecasts GDP growth of 3.1% in 2023, slightly lower than our 3.5% forecast.
Saudi Arabia’s net foreign assets at the central bank declined USD 6.4bn to USD 440bn in August, broadly in line with where it was at the end of 2021, despite the significant fiscal surplus that has been generated year-to-date. Credit growth continues to exceed deposit growth in the kingdom, with private sector credit up 1.3% m/m and 14.6% y/y in August while broad money supply growth accelerated to 9.0% y/y from 8.1% in July. Public sector borrowing also remains robust at 5.4% m/m and 25.8% y/y in August.
The UK economy expanded 0.2% q/q in Q2, an upward revision to the preliminary estimate of a -0.1% contraction, with private consumption and government spending revised higher. Nevertheless, the outlook for the economy has deteriorated on the back of surging inflation and the prospect of interest rates rising further than had been expected prior to the government’s decision to cut taxes and increase spending.
Eurozone inflation rose by a faster than expected 1.2% m/m and 10.0% y/y in September, according to preliminary estimates. Core CPI, which excludes volatile food and energy prices, also came in faster than expected at 4.8% y/y up from 4.3% in August, increasing pressure on the ECB to tighten monetary policy more aggressively. The market is now pricing a 75bp rate hike by the ECB this month.
US data showed personal spending rose by 0.4% m/m in August, almost double the growth rate analysts had expected, while personal income growth slowed to 0.3% m/m. The data shows that consumers are still spending despite higher borrowing costs and higher inflation, and they are spending more on services than goods. Of more concern to the Fed, it’s preferred measure of inflation accelerated in August. The headline PCE deflator rose 0.3% m/m and 6.2% y/y while the core PCE deflator rose 0.6% m/m and 4.9% y/y in August; the latter up from 4.7% y/y in July.
Former Brazilian president Lula da Silva beat incumbent Jair Bolsonaro with 48% of the vote to Bolsonaro’s 44%. This was not a wide enough margin to win outright and a runoff will take place on 30 October.
Japan’s Tankan large manufacturing index fell to 8 in Q3 from 9 in Q2 and below analysts forecasts as sentiment weakened particularly among manufacturers in the oil and coal and non-ferrous metal sectors. The non-manufacturing index rose to 14 however, as the prospect of re-opening the country to tourists boosted sentiment in the services sectors. Firms also indicated they planned to increase capital spending. The survey provides some vindication for the BoJ’s stance on continuing with accommodative monetary policy in order to support fragile growth.
The focus this week will be on US non-farm payrolls due Friday, with the median forecast at 250k, down from 315k in August. Before then we get September PMI data and durable goods, factory orders and JOLTS data for August. On the central bank side, RBNZ and RBA are expected to raise rates at meetings this week and the ECB will publish minutes from its September policy meeting on Thursday. OPEC+ meets on Wednesday and reports are that a production cut of up to 1mn b/d will be discussed. Chinese markets are closed this week.

Today’s Economic Data and Events

12:00 Eurozone manufacturing PMI (Sep) forecast 48.5
12:30 UK manufacturing PMI (Sep) forecast 48.5
17:45 US manufacturing PMI (Sep) forecast 51.8
18:00 US ISM manufacturing index (Sep) forecast 52.1

Fixed Income

Benchmark government bond markets ended the week on a volatile note although by the standards of the week as a whole, Friday’s moves were much more constrained. Gilt markets remain the dominant variable in near-term moves with the rapid sell-off and reversal likely to reverberate through markets for some time. Yields on the 10yr gilt closed the week at 4.076%, 26bps higher than a week earlier but well off highs nearer to 4.6% reached mid-week prior to the Bank of England’s emergency intervention.
Hot inflation in the Eurozone seems to have sealed the case for a75bps hike from the European Central Bank at the end of this month. Markets are pricing in that scale of a hike with almost near certainty for now. Bund markets closed mixed last week with the 2yr Schatz yield closing lower by 15bps at 1.747% while the 10yr bund yield closed at 2.105%, up 8bps.
Moves in US Treasury markets seemed much more sanguine than those in Europe although Treasuries were still caught up in the rapid selling and buying pressure. The 2yr UST yield closed the week up 8bps at 4.1924% while the 10yr yield added 14bps to 3.7856%.
Reports that China may seek to intervene to support its currency risk adding more volatility to Treasury markets this week, particularly if there is heavy selling to support the yuan.

In central banks this week, the Bank of Israel will set policy on October 3rd with markets expecting a 75bps hike. Later on in the week the RBA is expected to hike by 50bps as is the RBNZ. Sri Lanka will also set policy toward the end of the week with rates expected to be held at 14.5%.

The US dollar closed lower last week with the DXY index falling after two weeks in a row of large gains. Some of the excessive moves seen at the end of the prior week and the start of the last trading week have been unwound thanks to emergency intervention from central banks, actualized or expected. GBPUSD for instance is now back to the levels seen prior to the fiscal event where the government outlined major tax cuts.
Cable closed last week up almost 2.9% at 1.117 though risk to the downside still remains high. With no apparent pull back yet in the government’s tax cut and borrowing plans, sterling will still be at risk of disorderly sell-offs. EURUSD managed to add 1.2% last week to close at 0.9802 as markets look to how the EU will step in to manage the energy crisis and expect a steady string of rate hikes from the ECB. USDJPY was the standout among the majors in still pushing higher last week with the pair up nearly 1% to 144.74.

Commodity currencies couldn’t bear the selling, however, with USDCAD rising by 1.7% to 1.3829 while AUDUSD dropped 2% to 0.64 and NZDUSD fell by more than 2.5% to 0.56.

Equities

Global equity markets ended last week in mixed conditions with selling in the US offset marginally by rising markets in Europe. The Dow ended Friday down 1.7%, closing the week down 2.9% while the S&P 500 lost 1.5% on Friday, also bringing its weekly losses to 2.9%. The NASDAQ endured similar selling pressure.
In Europe the FTSE managed to eke out a 0.2% gain at the end of the week to limit the week’s losses to 1.8% while the EuroStoxx index fell 0.9% on the week.
Asian markets sold off heavily with the Nikkei down 4.5% and the Hang Seng losing about 4%.

Commodities

Oil prices managed to rise out the storm of risk asset selling last week with Brent futures rising by 2% to USD 87.96/b even after some heavy losses at the start of the week. WTI closed the week at USD 79.49/b, a weekly gain of 0.9%.
Market attention this week turns to Vienna where OPEC+ will hold an in-person meeting for the first time since the pandemic began in 2020. In order to prevent a further disorderly unwinding in oil markets OPEC+ is likely to cut output for November levels onward by a larger degree than what they planned for October, with as much as 500k b/d to 1m b/d potentially being cut.
The Abu Dhabi ICE futures exchange may add a derivative contract for Upper Zakum to follow on from the launch of Murban futures in March last year.

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