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Saudi Arabia Outlook
26.11.2025
Economic growth is expected to improve further to 5% in 2026, lifted by a significant recovery in oil output coupled with robust growth in the non-oil sector. The fiscal deficit, widening in 2025 on lower oil revenues, should narrow in 2026 on higher oil output and non-oil receipts as well as continued spending control. Downside risks to the outlook stem mainly from oil market volatility, adverse geopolitics and a slower pace of government-led investment, while key upside risks include stronger than-expected private investment, part of which could result from a pick-up in FDI.
Strong non-oil growth, driven by domestic demand
The Saudi non-oil economy is projected to grow by an upwardly revised 4% in 2025 and 2026 on still-strong domestic demand and continued progress on Vision 2030 economic diversification. The Saudi non-oil sector has been among the most robust in the GCC post-pandemic – a testament to the authorities’ transformational reform and investment initiatives – and we expect this momentum to continue. Socio-economic gains have accrued from historically low citizen unemployment, high female labor participation (6.8% and 37% in Q2 respectively), and faster wage growth, widening the kingdom’s productive base and expanding private consumption. In tandem with declining interest rates and continued reform progress, a positive outlook for the Saudi non-oil economy is well supported. This is even as the authorities are now looking to recalibrate their ambitious investment goals amid lower oil prices, de-emphasizing some giga-projects and shifting the focus of the PIF to more sustainable projects with higher near-term returns and lower execution risks.
At the sectoral level, we expect greater output gains from retail/trade & hospitality activities, with an increasing contribution to GDP coming from tourism. These activities collectively account for almost 21% of non-oil GDP, up from 18.5% in 2022. Manufacturing and transportation will also figure more, supported by rising industrial capacity and continued investment in logistics/transport. Higher frequency metrics, such as the PMI and industrial production indices, back this up, consistently signaling expansion. The former was back at near-series-high levels (60.2) in October. Meanwhile, bank lending growth, though slowing, is still very robust (14.3% y/y in September), which will support the ongoing expansion in private sector activity. That said, the moderation in bank credit growth, to closer to the deposit growth rate, is welcome as it will help ease rising liquidity pressures in the banking sector (LDR of 111% as of September).
Oil output rising as kingdom prioritizes market share
We have significantly revised upwards our oil GDP forecast, with the Saudis spearheading a faster-than-expected unwinding of OPEC-8 oil production cuts from 2023-24 to claw back market share. We now expect crude output to rise from an expected 9.48 mb/d on average in 2025 to 10.22 mb/d in 2026. This should boost oil GDP by 7.8% y/y in 2026 from 5.8% in 2025. Total GDP growth will reach 5% in 2026.
Inflation to moderate, housing rent inflation to subside
Inflation is expected to remain at around 2% on average in 2026, helped by disinflation in housing rents (20% of the CPI basket and down to a 3-year low of 5.7% y/y in October), despite rising price pressures in food and other consumer categories. The authorities’ move to freeze rents in Riyadh for 5 years will reduce inflationary impulses in this category by Q4 2026. Meanwhile, in line with loosening US Fed’s monetary policy, further cuts to Saudi benchmark rates (repo rate is currently 4.5%) are expected in 2026.
Fiscal deficits to be sustained over the medium-term
We see a fourth consecutive fiscal deficit in 2026, at 4% of GDP, narrower than 2025’s estimate (5% of GDP) which is the largest since 2020 and broadly in line with the authorities’ pre-budget figure of 5.3% of GDP. The wider 2025 deficit is due to expectations of reduced oil revenues (reduced dividend/royalty payments from Aramco) on the back of lower oil prices, though the ramping up of oil production and buoyant non-oil revenues should mitigate some of the expected decline in oil prices. Meanwhile, expenditure growth is set to decelerate significantly from the double-digit rates of previous years as the government exercises greater fiscal discipline. In fact, spending is on track for a slight decline in 2025 before returning to modest growth of around 2.5% in 2026. Central government debt will climb to 33% of GDP in 2026 from 30.5% in 2025. The government has reaffirmed its commitment to a fiscal stance that supports consumption and advances the investment-heavy Vision 2030 diversification strategy. Recently, S&P upgraded the kingdom’s sovereign credit rating to A+, citing solid fiscal and external fundamentals and continued progress on diversification.
Oil prices, geopolitics, investment momentum main risks
Mounting fiscal pressures amid lower oil prices is the main downside risk, as it could force a pull-back in government spending. External and geopolitical risks, from trade to regional tensions, could dampen growth, but we think the exposure is limited. Bank liquidity is also worth watching, though banks remain well-capitalized. On the upside, the PIF’s recent strategic shift could auger well for stronger private investment and FDI outcomes.
