Contact us
Open notifications

Notifications

  • No new notifications

     

]

Saudi Arabia Outlook

Saudi Arabia Outlook

05.05.2025

Economic growth is expected to rise to even stronger levels of 3.4% on average in 2025-26 as still-solid non-oil expansion is met with a recovery in oil sector output. The fiscal deficit is set to widen on a projected decline in oil revenues due to lower oil prices and reduced Aramco dividends, which will outweigh the sustained increase in non-oil income driven both by fiscal reforms and the expanding tax base. Downside risks to the outlook stem mainly from prolonged oil market and global trade disruptions which could exacerbate fiscal pressures and possibly lead to a slowdown in investment, while one upside risk is the potential for a rebound in FDI inflows, helped by recent upgrades to the regulatory climate. 

Sustained non-oil growth on robust domestic demand

We expect Saudi non-oil GDP to expand at a healthy rate of 3.6% on average in 2025-26, underpinned by growth-conducive conditions in the private sector. Investment levels will remain solid as the Vision 2030 push for economic diversification proceeds, while record-low unemployment (7% in 4Q24), coupled with rising tourism is supportive of sustained private spending growth. Additional support should come from gradually looser monetary policy, as the Saudi Central Bank lowers benchmark rates in line with the US Fed. Recent monthly indicators suggest that conditions in the non-oil economy remain upbeat, with private sector-led credit growth in double digits (14.9% y/y in March) and business activity as measured by the PMI expanding at a strong if moderating pace (56 in April). Continued regulatory reform progress drove a notable rise in commercial license registration in 2024; reforms included amendments to the commercial law to promote investment, streamlining the business setup process, special economic zones, the ongoing digitization of services and the introduction of a VAT rebate for tourists to enhance competitiveness. The steps could also support FDI inflows, which fell by 19% to a below target $21 billion in 2024.

Oil output to gradually recover on OPEC unwinding

We expect oil output to gradually recover in line with the scheduled unwinding of previous OPEC oil production cuts. In our baseline scenario, oil production will increase by a marginal 0.2 mb/d to an average of 9.18 mb/d in 2025 before a larger rise to 9.81 mb/d in 2026. Therefore, we see oil GDP growing by 1.0% in 2025, accelerating to 5.3% in 2026. Overall GDP is projected to grow by 2.9% and 4.0% in 2025 and 2026, respectively.

Inflation to edge up, but remain relatively low

Inflation is expected to rise modestly in 2025-26 on easing but still elevated housing and utilities inflation (just over 8% in March) and slower deflation in other categories as input prices continue to rise. Moreover, food inflation is trending upwards. Further, a potentially softer dollar could push up import prices of non-dollar denominated goods given the riyal-dollar peg, while some input costs could also be affected by higher tariffs. We forecast an inflation average of 2.3% over the forecast period from 1.8% in 2024 – though still low relative to the robust economic growth climate. 

Fiscal deficit to widen despite higher non-oil income

The fiscal deficit is forecast to widen to 4.2% of GDP in 2025 from 2.8% in 2024 primarily on the back of lower oil revenues due to a combination of lower oil prices and reduced Aramco dividends (dividend policy has been normalized after the exceptional payout of 2024). Partly offsetting the decline is the steady rise in non-oil income (taxes on goods and services, corporate income tax, etc.) reflecting proceeds from fiscal reforms and the ongoing expansion of the non-oil economy. Amid increasing fiscal pressures, the 2025 budget estimates a fiscal deficit of 2.6% of GDP on average in 2025 and 2026 and calls for more restrained expenditure growth via a modest increase in current spending (3.7% b/b) and a reprioritization of capex (-2.6% b/b). This is enabled via a partial shifting to off-budget funding channels, mostly the Public Investment Fund. The authorities may continue to overspend but to a much lesser degree compared to recent years as an effort is made to balance spending restraint with development goals. We see the breakeven oil price declining to $84 by 2026 from $92 in 2024 thanks to the abovementioned efforts.

Debt issuance will continue to be the primary mode of deficit financing and public debt is projected to rise to 35% of GDP by 2026 from 30% in 2024. In February, S&P upgraded the sovereign credit rating to A+ from A, on par with Japan and China, citing economic diversification and reform progress. 

Downside risks mainly from trade and geopolitics

We expect the Saudi economy to broadly withstand current external pressures as trade disputes weigh down on the global economic outlook, supported by continued momentum in the domestic non-oil economy with solid consumer sentiment and sustained vision-linked investment and reform progress. Downside risks include the potential for investment levels to disappoint amid fiscal constraints (especially if oil prices fall steeply) in addition to the possibility of severe geopolitical events. On the upside, a renewed pick-up in FDI in response to recent business-friendly reforms would be supportive of faster non-oil growth, while a swift resolution of global trade tensions and a subsequent recovery in oil demand could prompt a faster oil sector recovery.

 

Dowmload Full Report>