00:00Last week, I would say there were two major developments that came through from Saudi Arabia.
00:05The EA Sports, a largest leveraged buyout in history with the biggest chunk of funding equity financing coming from PIF.
00:12The same week that Saudi Arabia are also revising upwards their budget deficit for the year.
00:18So how do you square the two up together?
00:20How is it that the PIF are still committing this amount of financing to external investments in a year where clearly there's a lot of pressure on the domestic budgets?
00:31Well, I think if we take the budget for to start off with, I mean, when we looked at what was being planned for 2025 when it got announced around this time last year,
00:39we thought that the projections were a little bit too shallow, a little bit too conservative in terms of the fiscal deficit that was being planned.
00:46So our forecast originally was around a 5% of GDP deficit.
00:51So the government now coming in and saying that's more or less where they're seeing the numbers this year,
00:56I think is a reflection that the revenue situation has not been as strong related to the oil story.
01:01But on the other side, you know, this commitment to expenditure, this commitment to GRE spending from an investment like the one from PIF into EA,
01:11is just more of a commitment to the diversification strategy.
01:15So these are investments that are going to be generating returns for Saudi government, whether that's directly through PIF or directly to the government balance sheet itself.
01:23And I think they fit into a longer strategy of the transformation and diversification of the Saudi economy.
01:29How do you see the evolution of the Saudi budget deficits in coming years?
01:33And what are the options that authorities have?
01:35Do you see them massively tightening in and reining in spending or are they going to have to somehow raise revenues?
01:41So we think it's going to be in deficit for a couple of years, but probably on a declining path from what we expect for 25 and 26,
01:48where it'll be probably around about 5% this year, maybe closer to 4% for 2026.
01:52And I think we're probably using a lower oil price assumption in our forecast than maybe the Saudi government is doing going forward.
01:58In terms of how they're going to be financing, look, Saudi Arabia has been very transparent about saying, hey, we're going to have a borrowing plan.
02:05We're going to issue that at the end of this year and we're going to tell investors what kind of capital that we're going to be needing.
02:10And they've been very transparent about we're going to go out to markets usually pretty early.
02:14They're usually when the first come out sort of January times with big issuances.
02:18And they remain to have very strong access to capital markets as well.
02:22So we don't see a lot of pressure on that side for them to be able to raise money through borrowing.
02:28Also, the debt position of Saudi Arabia to start with is very low for a trillion dollar plus economy.
02:33You know, you're talking low 30% of GDP in terms of total public debt.
02:38So there is ample room for them to continue to be able to borrow.
02:40Yeah. At what point do you think these wider budget deficits are going to have a knock on effect on investors' willingness and appetite to fund Saudi Arabia at these levels?
02:51I.e., is there going to have to be a risk repricing to account for the wider deficits?
02:56Well, I think already you're seeing that in terms of the kind of spreads that Saudi gets relative to some of the peers across the region.
03:01So they're a little bit wider.
03:02They're not particularly extravagantly wide, but compared with some of the other markets in the GCC, they're a little bit wider, as you'd expect.
03:09Still, the ratings for Saudi Arabia are very strong.
03:14You know, good investment-grade credit that's available, a regular borrower, a diversification and transformation story that is pretty strong.
03:21And I think investors continue to buy into it.
03:23We're not really worried about the deficit really widening substantially from what we expect around the sort of 5% for 2025.
03:31But if you saw that really materially deviate, if there was sort of a runaway spending, which very evidently there is not.
03:39If you look at the pre-budget plan, yes, there's an increase in spending next year.
03:42But thereafter, there are relatively moderate increases and a budget shortfall that, in the government's projections, comes closer to about 2% of GDP.
03:50So not really worrisome numbers, I think, as far as the investor base is concerned.
03:54So let me ask you a growth question.
03:55The IMF are expecting the PIF to spend about $40 billion a year at home.
04:00Is that growth stimulative?
04:01Well, look, I think the strategies from the PIF are multiple.
04:06One of them is certainly to invest in assets that are going to help the growth story for Saudi Arabia.
04:10And we have seen really robust activity in the non-oil economy.
04:13The PMIs that we have for September, for instance, were really strong.
04:16I think the other angle for PIF is to invest into a transformed Saudi sociocultural experience.
04:24So it's not just about generating economic returns.
04:27It's about what is Saudi Arabia going to look like in 2030 and beyond in terms of opportunity, in terms of living quality.
04:33And finally, let me just ask you, OPEC+, that is, you know, we had the decision this weekend.
04:37But steadily, it's been Saudi Arabia that have been bearing the brunt or taking upon themselves to bring those extra barrels back to the market.
04:46Is that a boon for the Saudi Arabian economy because they're finally able to produce more in terms of revenues?
04:53Well, I think it's a definite shift in the strategy to say, well, we're not going to go down a price targeting route anymore.
04:58We are going to go for a value or, pardon me, a volume versus value kind of approach.
05:03So they'll be able to capture more and more of an oil market share in the balance when there are some restraints on other producers who maybe would want to get access to it.
05:11So we do think it is positive in terms of the revenue that's going to be generated, even if it's at lower prices, but also contributing to growth in a serious way.
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