Saudi Arabia faces budget crisis as oil prices plunge

[WORLD] An analyst at Goldman Sachs cautioned that a collapse in oil prices brought on by declining demand, concerns about a global trade war, and an increase in crude supply could more than treble Saudi Arabia's annual budget deficit. The monarchy is under pressure to alter its massive expenditure plans and fiscal measures, as highlighted in the bank's assessment.

The recent downturn in oil prices reflects broader macroeconomic uncertainties, including sluggish growth in China—the world’s largest crude importer—and a surge in U.S. shale production. These factors have compounded the challenges for OPEC+ producers, who have struggled to stabilize prices despite repeated supply cuts. For Saudi Arabia, which relies on oil for roughly 60% of its GDP, the volatility presents a critical test of its long-term economic strategy.

Farouk Soussa, a Middle East and North Africa economist at Goldman Sachs, stated on Wednesday on CNBC's Access Middle East that "the fiscal deficits that we're likely to see in the GCC [Gulf Cooperation Council] countries, especially big countries like Saudi Arabia, are going to be pretty significant."

Vision 2030, a comprehensive initiative to revamp the Saudi economy and diversify its sources of income away from hydrocarbons, has caused the kingdom's spending to soar. Neom, a sparsely populated mega-region in the desert around the size of Massachusetts, is a focal point of the project.

Critics have questioned the feasibility of Neom’s ambitious timelines, particularly as financing costs rise and global investor caution grows. Delays or scaling back of certain projects, such as The Line, a proposed 170-kilometer linear city, could signal Riyadh’s need to prioritize fiscal sustainability over grand visions. However, Saudi officials remain publicly committed to the initiative, framing it as non-negotiable for the kingdom’s post-oil future.

The hyper-futuristic developments planned for Neom are anticipated to cost up to $1.5 trillion in total. In addition, the monarchy is hosting the notoriously expensive 2030 World Expo and the 2034 World Cup.

According to the International Monetary Fund, Saudi Arabia needs oil at more than $90 per barrel in order to balance its budget. This week, Goldman Sachs reduced its forecast for the year-end 2025 oil price to $62 per barrel for Brent crude, from its earlier estimate of $69, which the bank's economists warn could more than treble Saudi Arabia's $30.8 billion budget deficit in 2024.

The kingdom’s fiscal pressures come amid broader geopolitical shifts, including its bid to join the BRICS bloc and deepen ties with non-Western economies. Analysts suggest these moves could open alternative funding avenues, such as yuan-denominated bonds or partnerships with sovereign wealth funds in Asia. Yet, reliance on such measures may introduce new complexities, including currency risks and regulatory hurdles.

According to Soussa, "if oil prices stayed around $62 this year, we're probably going to see the deficit in Saudi Arabia go up from around 30 to 30 to 35 billion to around 70 to 70 to 75 billion."

"That entails more borrowing, likely more spending reductions, likely more asset sales, and all of the above, and this will have an effect on domestic and possibly even global financial conditions."

"Given the shakiness of international markets right now, financing that level of deficit in international markets is going to be challenging," he noted, and probably implies Riyadh would have to consider other ways to close their funding shortfall.

The kingdom's debt-to-GDP ratio is just under 30% as of December 2024, meaning they still have a lot of leeway to borrow. By contrast, the debt-to-GDP ratios of the United States and France are 124% and 110.6%, respectively. However, Soussa pointed out that the market would find it challenging to accept a $75 billion debt offering.

Meanwhile, Saudi Arabia’s Public Investment Fund (PIF), with assets exceeding $900 billion, could play a pivotal role in offsetting fiscal shortfalls. The sovereign wealth fund has already begun adjusting its investment strategy, pivoting toward domestic projects that align with Vision 2030 while scaling back some international ventures. However, over-reliance on PIF reserves could strain its ability to act as a global investor, a key pillar of the kingdom’s economic influence.

"While reassuring, that debt to GDP ratio doesn't mean that the Saudis can issue as much debt as they like... they do have to look at other remedies," he said, adding that more domestic assets, such as state-owned businesses Saudi Aramco and Sabic, should be sold, capital expenditures should be reduced, or taxes be raised. According to local economists, a number of Neom projects might be put on the cutting block.

S&P Global Ratings has given Saudi Arabia an A/A-1 credit rating with a favorable outlook, while Fitch has given it an A+ rating with a stable outlook. The kingdom is well-positioned to handle a deficit because of this and its substantial foreign exchange reserves, which as of January totaled $410.2 billion, according to CEIC data.

S&P Global stated in September that the kingdom's reforms "will continue to improve Saudi Arabia's economic resilience and wealth" by diversifying revenue streams and promoting and de-risking foreign investment.

"The Saudis have a lot of options, and it's hard to predict how they will be combined, but we're definitely not in danger of a crisis," Soussa stated. "It just depends on the choices they make to address the difficulties they are encountering." At 9:30 a.m. London time on Thursday, the price of the world's benchmark Brent crude was $63.58 a barrel, down about 14% so far this year.