Saudi Arabia, which depends heavily on oil revenues to balance its budget and finance its massive economic transformation plan, may be forced to tighten fiscal policy further or seek recourse in the debt market, or it may even consider raising new taxes, given that global oil prices fell to a four-year low last week.
Oil prices have fallen due to the surprise supply increase by OPEC+ members in the first weeks of April 2025, due to the rising threat of a United States-China trade war and its dire effects on the world economy. The IEA has also significantly reduced its growth projections for oil demand in 2025 and 2026. Since the start of the month, both the US West Texas Intermediate crude and Brent, the primary benchmark for Middle Eastern producers, have dropped by about USD 10.
In contrast to BMI’s projection of USD 68 for the benchmark, Goldman Sachs now projects Brent to average USD 63 for the rest of 2025.
State-backed energy company Saudi Arabian Oil Company’s forecast for a smaller dividend payout of roughly USD 85 billion in 2025 as opposed to USD 124 billion in 2024 is another factor straining the government’s finances.
According to the IMF, Saudi Arabia needs oil at more than USD 90 a barrel to balance its budget. Despite the government’s current and fiscal account deficits, Fitch Ratings projects that in 2025, the fiscal deficit will increase to 4.1% of GDP due to decreased dividend payments from Aramco and an average price of USD 70 for Brent.
Paul Gamble, Senior Director of Sovereigns at Fitch Ratings, noted that under normal circumstances, “A USD 10 per barrel drop in the oil price would increase the budget deficit by around 3 percentage points.”
“We had already been projecting a fiscal deficit for Saudi Arabia in 2025 prior to the sell-off that started in April, and with oil prices set to hold at lower levels for the rest of this year, we now expect that the fiscal deficit will widen,” stated Edward Bell, Acting Group Head of Research and Chief Economist at Dubai-based Emirates NBD.
Growth Without Oil
The non-oil sector, which grew 4.3% in 2024 and outpaced the 1.3% rise in the total GDP, was predicted to account for a large portion of the Kingdom’s growth in 2025.
Any fiscal policy step to reduce overall spending might also restrain development in the non-oil sector, even if Saudi Finance Minister Mohammed Al Jadaan has reaffirmed that the Gulf nation’s focus is currently on increasing non-oil GDP.
“So far this year, non-oil growth has stayed strong, and the domestic market continues to show a strong pipeline of new orders for 2025. Later in the year and into 2026, government expenditure may decline, which would limit the growth rate of the entire economy,” Bell added.
According to reports, several of the most ambitious megaprojects have been scaled back or recalculated by the Public Investment Fund, the Saudi sovereign wealth fund that is leading the nation’s economic transformation initiative.
As part of the recalibration, companies hired to build NEOM, the Red Sea development that is the cornerstone of Crown Prince Mohammed bin Salman’s economic diversification agenda called “Vision 2030,” are reportedly laying off employees and cutting budgets.
Arenas and stadiums that are anticipated to host major international sporting events, such as the Asian Winter Games and FIFA World Cup, have been pushed to the front of the line.
“Saudi Arabia has committed to several projects with deadlines set by other parties, including the 2029 Asia Winter Games, the 2034 [FIFA] World Cup, and Expo 2030, which will take place in Riyadh. Logistics, event locations, hospitality, and infrastructure are among the projects associated with major events, and we anticipate that expenditures will be kept constant. Timelines for other projects might be extended, or the initial delivery scale may be reduced,” Bell stated.
The Market For Debt
In the event of a low oil price, Saudi Arabia, which has stated plans to raise USD 37 billion in 2025 from both local and international markets to cover the budget deficit, may increase borrowing. It helps that Moody’s Investor Services improved its sovereign rating from A1 to Aa3 in November due to the economic diversification programme’s favourable pace.
According to Moody’s, “A significant drop in oil production or prices could exacerbate the trade-off between fiscal prudence and economic diversification progress, potentially resulting in a weaker sovereign balance sheet.”
Saudi Arabia has good access to financial markets, according to Bell of Emirates NBD, and “we would expect them to continue raising both local and foreign currency debt to help maintain spending commitments.”
The Ministry of Finance estimates that public debt will be at 30% of GDP in 2024, which is comparatively low when compared to economies of comparable size.
Senior Economist Hekmat El Matbouly of the Egyptian investment firm CI Capital claims that the managed public debt will allow for further borrowing, increasing from 30% of GDP last year to 35% in 2025.
“Borrowing activities benefit from a sustained decline in the USD because it relieves pressure on the peg from higher borrowing costs for longer periods,” she added.
According to LSEG data, the monarchy has raised USD 14.1 billion from two Eurobond issuances so far in 2025.
New Taxes
According to James Swanston of the London-based consulting firm Capital Economics, “the Saudis’ first course of action will likely be cuts to capital spending. But there may also be fresh efforts to raise non-oil revenues and, possibly, to push through new taxes, such as property or personal income taxes.”
Gamble acknowledged the potential for increased taxes.
“Saudi Arabia has expanded its revenue-raising options in recent years, but it takes planning to impose new levies anywhere. The authorities also have the option of altering the current tax rates,” he continued.
With no simple answer in sight, Saudi Arabia must negotiate a challenging economic environment while striking a balance between short-term budgetary requirements and long-term strategic objectives.
Achieving its “Vision 2030” goals and preserving economic stability will depend heavily on the Kingdom’s capacity to adjust to these difficulties.