Saudi Arabia’s Budget Deficit: A Growing Concern Amidst Slumping Oil Prices
In Riyadh, the economic outlook is increasingly troubling as plummeting oil prices triggered by decreased demand, trade tensions, and rising crude production threaten to substantially widen Saudi Arabia’s budget deficit. According to economists from Goldman Sachs, the kingdom may face a deficit that could more than double, necessitating urgent changes to its extensive spending plans and fiscal strategies.
Farouk Soussa, the Middle East and North Africa economist at Goldman Sachs, shared insights on the potential financial pressure in the Gulf Cooperation Council (GCC) countries during a recent interview. He emphasized that the fiscal deficits in Saudi Arabia and other major GCC nations are projected to be significant.
Saudi Arabia’s spending has surged primarily due to its Vision 2030 initiative, a comprehensive effort aimed at transforming the nation’s economy and reducing its reliance on oil. A key component of this ambitious project is Neom, a vast undeveloped region in the desert, comparable in size to Massachusetts.
Neom has grand plans for hyper-modern developments, with projected costs soaring up to $1.5 trillion. Additionally, the kingdom is preparing to host two major events: the 2034 World Cup and the 2030 World Expo, both known for their substantial financial requirements.
Current estimates suggest that Saudi Arabia needs oil prices to exceed $90 per barrel to balance its budget. However, Goldman Sachs recently revised its 2025 oil price forecast, predicting Brent crude prices to be around $62 per barrel. This adjustment could potentially drive Saudi Arabia’s budget deficit for 2024 from $30.8 billion to a staggering $70-75 billion if oil prices stabilize at this level, as highlighted by Soussa.
Should such a scenario unfold, Saudi Arabia would face increased borrowing, cuts to spending, and possibly even the selling of assets. This fiscal challenge is likely to impact both domestic financial conditions and international perceptions of the kingdom’s economic health.
The Kingdom of Saudi Arabia maintains a relatively comfortable debt-to-GDP ratio, currently just under 30% as of December 2024. This is significantly lower than other economies like the United States and France, which have debt ratios of about 124% and 110.6%, respectively. Still, the prospect of absorbing $75 billion in new debt could pose difficulties in the market.
Despite having room to borrow, the government must consider other solutions. These could range from cutting capital expenditures, increasing taxes, to selling domestic assets, including state-owned entities like Saudi Aramco and Sabic. It’s anticipated that the scope of some Neom projects may be reevaluated under these constraints.
With an A/A-1 credit rating from S&P Global Ratings, along with an A+ rating from Fitch and substantial foreign currency reserves amounting to $410.2 billion as of January, Saudi Arabia possesses tools to manage its fiscal challenges. The nation has introduced various reforms intended to attract foreign investments and diversify its revenue sources.
According to S&P, these measures should bolster Saudi Arabia’s economic resilience and overall wealth. Soussa remarked that Saudi Arabia is not on the brink of a crisis, but rather navigating a series of choices on how to effectively address these emerging difficulties.
As of recent market conditions, Brent crude was changing hands at approximately $63.58 per barrel, reflecting a decrease of around 14% year-to-date. This trend necessitates a vigilant approach from Saudi Arabia in managing its budget, particularly as the global economic landscape continues to evolve.
In summary, the mixture of fluctuating oil prices, ambitious development plans, and potential fiscal adjustments presents a complex scenario for Saudi Arabia. With Vision 2030 at the forefront of its economic reform agenda, the kingdom must delicately balance its growth ambitions with the realities of the current financial environment. This situation will require careful navigation, as Saudi Arabia seeks to secure its economic future amidst the challenges of global oil markets.
