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Economic Insight
14.10.2025
The Saudi Ministry of Finance (MoF) in its recently published 2026 pre-budget statement revised up its deficit projection for this year by more than double due to lower-than-expected oil revenues linked to global economic volatility and continued, elevated development plan-related expenditures. For 2026 and beyond, however, the fiscal deficit is expected to broadly narrow, amid expectations of higher non-oil revenues, greater fiscal restraint and robust economic growth. The government was clear that it intends to continue with a supportive fiscal policy that will underpin consumption and drive the investment-intensive Vision 2030 diversification plan.
The MoF estimates the kingdom’s budget deficit this year widening to a five year-high of SR245 billion ($65 billion). This is equivalent to 5.3% of GDP in 2025 and more than twice the size of both the initial estimate outlined in the 2025 budget (2.3% of GDP) and 2024’s actual outcome (2.5% of GDP). This is largely due to lower-than-expected oil revenues (-8% vs. 2025 budget) caused by softer oil prices amid heightened global trade-tariff-linked macroeconomic uncertainty. Reflecting the downturn in the oil market, Saudi Aramco had to announce earlier in the year a cut in its dividends, the main conduit for government oil receipts. In contrast, we expect that non-oil revenues, which the authorities did not estimate in the 2026 pre-budget statement, will likely continue their strong growth of recent years (+8% y/y avg. in 2022-2024), growing in line with the expanding non-oil economy and tax base. These non-oil revenue gains have lessened the public finances’ sensitivity to oil price fluctuations, although it remains acute. On the expenditures side, meanwhile, spending is estimated to overshoot budget projections – as is typically the norm – but by a much smaller 4% margin compared to earlier years (5-yr average of 12%). This would also imply a fall in year-on-year actual spending (-2.8%), the first since 2021.
Deficit to decline over the medium-term on non-oil gains, spending restraint and economic growth
Over the medium term, the pre-budget statement projects a gradual narrowing of the deficit from 3.3% of GDP in 2026 to 2.2% of GDP in 2028, supported by higher revenues (+3% y/y on average in 2026-2028) resulting from a combination of higher oil production (following the unwinding of 2023-2024 OPEC+ voluntary supply cuts), further increases in non-oil income and continued robust non-oil economic growth. This is despite a projected 3% b/b dip in revenues in 2026, which is unlikely to materialize given the much lower base level in actual terms (below budget revenues) and the usually conservative oil revenue assumption. On spending, policy will continue to be supportive, with a 2.2% b/b increase in expenditures in 2026 and 3.4% on average in 2026-2028. Spending restraint is evident, however, in the fact that this is well-below the average rate of the past three budgets (10.6%), with the government seeking to balance economic growth and Vision 2030 development goals with fiscal sustainability. Despite the slower growth in government spending, investment levels should remain buoyant with support via alternative, off-budget funding channels, mainly the Public Investment Fund (PIF), which is playing a central role in the fulfillment of key Vision 2030 projects. This is reflected in the continued increase in PIF’s assets and investments, including domestic assets, where AUMs reached SR3.5 trillion ($930 billion) as of July 2025.
Deficit and public debt levels sustainable over the medium term
The projected deficits should lead to an increase in the debt level to around 35% of GDP by 2028 from about 28% presently, we estimate. The government maintains that debt will rise in a controlled and sustainable manner, supported by robust financial reserves and diversified funding sources including local and international bond and sukuk issuances as well as through project finance and export credits. Looser monetary policy – lower borrowing and debt service costs – would also be supportive. GDP growth is forecast at 4.6% in 2026, on robust non-oil sector growth, structural reforms, and improved labor market dynamics. Indeed, with the economy larger in absolute terms on the back of non-oil sector gains especially, debt ratios will remain manageable and under the self-imposed ceiling of 40%. The sovereign’s credit rating, upgraded recently to A+ by S&P on the kingdom’s solid fiscal and external metrics and progress on economic diversification, should remain strong. There are downside risks to the fiscal outlook, though, in potentially lower oil prices and fractious global trade and geopolitics and perhaps less aggressive monetary easing.
