Saudi fiscal challenges deepen as oil prices plunge

This would mean that the deficit would be more than double the forecasts from the end of 2024. The situation may force Prince Mohammed bin Salman to increase debt on global bond markets.

Oil prices have fallen to their lowest level in about four years after US President Donald Trump announced new tariffs on imports from almost all countries on 2nd April, increasing the risk of a global recession. Shortly thereafter, the OPEC+ cartel, in which Saudi Arabia and Russia have significant influence, surprised energy markets with the announcement of accelerated plans to increase production. Although the price of Brent crude oil rebounded after Trump's announcement of delaying some tariffs, it remains at about £50 per barrel, which means a decrease of almost 15% over the past week.

The Saudi Ministry of Finance stated that it is still assessing recent events and is ready to take all necessary steps to maintain a strong fiscal position.

Even before the price collapse, oil was too cheap for Saudi Arabia to balance its budget. According to Ziad Daoud, chief emerging markets economist at Bloomberg Economics, last year the Saudi government needed prices at £72 to achieve budget balance. If you consider the expenditure of the state wealth fund on the crown prince's mega-projects, the oil price would need to rise to as much as £84.

In recent months, the Saudi government has delayed some spending decisions. The Ministry of Finance explained that this action aimed to reprioritise and avoid overheating the economy.

Although Saudi Arabia does not disclose its oil price assumptions for its budget, it estimated this year's fiscal deficit at 2.3% of gross domestic product, but it could rise to 3.7% in a low-income scenario. According to Goldman Sachs, the amount of £52 billion would mean a gap exceeding 6%, the largest since 2020, during the COVID-19 pandemic.

Increasing oil production under the new OPEC+ plans will do little to offset revenue losses from lower prices, says Daoud, who reduced this year's growth forecast for the £850 billion economy to 2.6% from 3%. In his opinion, the non-oil sector, on which the crown prince's projects focus and which employs the vast majority of Saudis, will suffer. Daoud explained that Saudi Arabia’s success outside the oil sector still heavily depends on income from oil. He noted that when prices fall, it leads to budget reductions, a deceleration in construction projects, and fewer jobs in the public sector.

Saudi Arabia is likely to increase debt even though it is already the largest bond issuer on global markets among developing countries, selling dollar and euro-denominated bonds worth almost £11 billion in 2025. According to calculations by Tim Callen, a visiting scholar at the Arab Gulf States Institute in Washington, the country could raise almost £13 billion extra by the end of the year, provided no further spending cuts are made.

In favour of the Gulf state is a debt-to-GDP ratio of about 30%, much lower than most other emerging markets. S&P Global Ratings last month upgraded Saudi Arabia's rating to the level of Japan and China, stating that the government's efforts to diversify the economy's sources of income are gaining momentum.