Saudi Arabia projects 4.9% deficit, braces for years of borrowing

Summary

• Riyadh now sees a budget deficit of 4.9% of GDP this year, Semafor reported
• Higher oil prices offset lower export volumes, but spending is rising faster than revenue
• Sustained borrowing could push government debt past its 40%-of-GDP ceiling this decade

The latest

Saudi Arabia expects wider budget deficits for several years as it increases spending to support growth during regional conflict, Semafor Gulf reported. The Finance Ministry now puts this year's deficit at 4.9% of GDP, well above the 3.3% it forecast late last year. Next year's preliminary budget signals Riyadh is prepared to keep borrowing to fund defense and new trade routes.

Details

• The deficit revision: According to Semafor Gulf, the Finance Ministry's current deficit estimate of 4.9% of GDP is 1.6 percentage points wider than the figure it projected late last year. The gap reflects a spending path rising faster than revenue rather than a collapse in income.
• The revenue picture: Higher oil prices have largely offset lower export volumes, lifting revenue above prewar estimates, Semafor reported. That cushion has not been enough to hold the deficit steady, because the government is expanding outlays faster than the additional income arrives.
• The debt ceiling: The outlet reported that continued borrowing raises the prospect of government debt breaching its 40%-of-GDP ceiling before the decade ends if growth does not accelerate. The kingdom has treated that threshold as a self-imposed fiscal anchor.
• The contraction: The economy is expected to shrink 3.6% this year as oil output falls sharply, according to Semafor Gulf. The projected decline is driven by the production side rather than by weakness in domestic demand.
• The rebound case: Riyadh sees output rebounding almost 13% in 2027, but only if oil flows are restored, the newsletter reported. The forecast is conditional, and no timeline was given for when normal flows might resume.
• Non-oil growth: The government says the non-oil economy and job creation drove growth in the first half of this year, Semafor reported. That performance is the main offset to the sharp drop in crude output in the official account of the year.
• Bypassing Hormuz: Next year's preliminary budget funds defense spending and the construction of trade routes that bypass the Strait of Hormuz, according to the report. The investment points to a multi-year commitment rather than an emergency response.
• Export workaround: Riyadh has brought oil exports close to prewar levels by piping crude to the Red Sea and sending tankers through Hormuz despite Iranian threats, Semafor Gulf reported.
• Spending restraint: The government has also taken steps to cut back on non-essential spending, the outlet reported, without specifying which programs were trimmed or how much the reductions are expected to save.

Background

The 40%-of-GDP debt ceiling is a limit Saudi Arabia set for itself as part of its fiscal framework. Breaching it would mark a shift in how the kingdom finances a spending program that now carries both defense and infrastructure costs.

Between the lines

The budget reads as a decision to buy insurance. Funding pipelines to the Red Sea and routes around Hormuz costs money now to reduce exposure later, and Riyadh has chosen that over protecting the deficit target. The 13% rebound projected for 2027 rests on oil flows being restored — a condition outside the government's control, which is what makes the debt ceiling question live.

What's next

Watch the final 2027 budget for confirmed spending levels, the pace of sovereign debt issuance, and monthly export volumes through the Red Sea route as a test of the restored-flows assumption behind the rebound forecast.

Source: Semafor Gulf