Analysts at BCA Research argue that the kingdom’s economy, still deeply tied to crude oil revenues, is vulnerable to anticipated declines in global oil prices and slowing nominal growth.
While efforts under Vision 2030 have bolstered domestic demand through diversification, the broader economic picture remains precarious.
Over the past year, Saudi Arabia has made strides in reducing its dependence on oil exports, evidenced by a 4.4% growth in real domestic demand despite declining oil revenues.
Infrastructure investments and borrowing, both domestically and internationally, have played a key role in sustaining consumption and business activity.
However, overall GDP growth has lagged, slipping into negative territory in 2023-24, as oil export revenues, a crucial component, faltered.
The connection between oil prices, nominal GDP, and the stock market is especially stark. Saudi stocks, more closely aligned with the health of the broader economy than with domestic consumption, are likely to struggle if crude oil prices weaken further.
BCA Research projects that global crude demand will remain subdued in 2025 due to slowing global growth, keeping oil prices under pressure.
Moreover, Saudi Arabia’s cautious production stance—aimed at avoiding market oversupply—means that the kingdom’s oil revenues will likely continue to face headwinds.
Fiscal policy adds another layer of uncertainty. The proposed 2025 budget includes significant expenditure cuts of 4.5% from 2024 levels, a move aimed at curbing the rise in public debt.
Yet, this fiscal restraint risks stifling domestic liquidity and economic activity. Saudi Arabia’s high borrowing costs, tied to the U.S. Federal Reserve’s interest rate policies due to the currency peg, exacerbate the economic strain, limiting private-sector credit growth and investment.
Public debt, meanwhile, has ballooned, increasing from $12 billion in 2014 to $306 billion in 2024, now representing 28% of GDP.
This trajectory is unlikely to reverse soon, given the dual pressures of weak oil revenues and ongoing Vision 2030-related expenditures.
For investors, the outlook is cautious. BCA Research recommends maintaining a neutral stance on Saudi equities within emerging market portfolios, reflecting skepticism about the market’s ability to outperform amidst these challenges.
Similarly, Saudi sovereign credit has been downgraded from overweight to neutral due to rising debt levels and widening credit spreads relative to emerging market peers.
