Analysis: How the oil price plunge complicates Saudi Arabia's economic agenda

Zawya

08-04-2025

DUBAI: Saudi Arabia, with its wealth linked inextricably to oil revenue, faces mounting pressure to raise debt or cut spending after a plunge in crude prices, complicating plans to fund an ambitious agenda to diversify its economy.
Oil prices have tumbled to near four-year lows on fears a trade war will hit global growth and after a surprise decision by some OPEC+ oil producers, including Saudi Arabia, to boost their output plans.
The price decline threatens to erase tens of billions of dollars of Saudi revenue, along with a planned drop in dividends from state-controlled energy giant Saudi Aramco.
The International Monetary Fund and economists estimate Riyadh needs oil prices of over $90 a barrel to balance its budget. Benchmark Brent prices slipped below $65 this week.
VISION 2030
While Saudi Arabia funds its Vision 2030 reform program off budget, the government needs to spend on mammoth infrastructure projects linked to the program, which aims to wean the economy off its self-declared "oil addiction."
The $925 billion Public Investment Fund, which is steering Vision 2030, also partly relies on oil, including through its shares in Aramco.
"Saudi Arabia is likely to rely on debt financing, and it will have to delay or scale back some planned contracting awards given 2024 was already in a twin deficit," said Karen Young, senior research scholar at Columbia University's Center on Global Energy Policy, referring to fiscal and current account deficits.
Before the U.S. tariffs announcement, she said analysts had expected Saudi public debt to surge by $100 billion in the next three years. It jumped 16% to over $324 billion in 2024, official figures show.
Aramco's dividends are also expected to fall by a third this year, meaning the government and PIF will receive about $32 billion and $6 billion less, respectively, Reuters calculations show.
Oil generated 62% of government revenue last year. Riyadh has not forecast oil revenue this year but in its 2025 budget released in November, it projected a 3.7% fall in total revenue.
RECALIBRATING
PIF is also likely to seek additional financing, analysts said. The fund's Governor Yasir Al-Rumayyan said last year it intends to boost annual investments to $70 billion between 2025 and 2030 from $40-50 billion.
PIF declined to comment.
Saudi Arabia was among the largest emerging market debt issuers last year and the government has already raised $14.4 billion in bonds this year.
PIF, which borrowed $24.8 billion last year via bonds and loans, has already raised $11 billion in 2025. Several other state-linked entities have also raised billions.
PIF has ploughed hundreds of billions of dollars into the local economy, in everything from a camel dairy firm to NEOM, a gargantuan futuristic city in the desert.
Projects ahead include the 2029 Asian Winter Games, set to feature artificial snow and a man-made freshwater lake, and the 2034 World Cup, for which 11 new stadiums will be built and others renovated.
The finance ministry is "recalibrating and prioritising" spending to ensure the economy, including the private sector, can "catch up" while avoiding "overheating the economy," a spokesperson said.
"We are assessing the recent developments and stand ready to take whatever policy decisions needed to ensure that our fiscal position remains strong," the spokesperson said.
"We remain confident that most of our vision targets are either achieved or on track and we will deliver on the key events we are hosting."
The plunge in oil coincides with geopolitical realignments as U.S. President Donald Trump upends a global economic order in place since World World II.
Trump has pressured OPEC and its de facto leader Saudi Arabia to cut oil prices and urged Riyadh to invest $1 trillion in the United States. He is due to visit Saudi Arabia, Qatar and the United Arab Emirates on his first foreign visit in May.
Lower oil prices "will likely lead to additional re-prioritisation of major projects, further rationalisation, revision of delivery timelines and a reduction in project work forces," said Neil Quilliam, associate fellow at the Middle East and North Africa Programme of London-based think tank Chatham House.
Yet, the government is likely to view the short-term risk of lower oil prices as worth the long-term benefit, Quilliam said, noting the kingdom enjoys a low debt-to-GDP ratio and confidence from lenders.
S&P raised Saudi Arabia's rating to 'A+' from 'A' last month, but said unfavourable oil price movements and more debt-funded investments were among factors that could lower that rating.
(Reporting by Yousef Saba; Editing by Elisa Martinuzzi and Bernadette Baum)