Saudi growth to strengthen in 2H -BMI

Rebounding from the conflict: The Kingdom is emerging as one of the Gulf economies that held up well amid the regional conflict, with growth expected to strengthen in 2H after contracting in 2Q. “Saudi Arabia is one of those GCC economies that has come through the conflict relatively well so far,” BMI senior analyst for MENA country risk Abdallah Saleh said in a webinar attended by EnterpriseAM. Growth is forecasted at some 1% in 2026, as business activity recovers from the wartime disruptions earlier this year.

Signs of recovery: Business surveys have improved, companies have reported stronger demand, while rising wages and resilient labor market conditions continue to support household spending.

REMEMBER- The IMF recently lowered its 2026 Saudi GDP growth forecast to 1.7% from 2% projected in June, while raising its 2027 forecast by one percentage point to 5.5%, while Fitch Ratings affirmed Saudi Arabia’s long-term foreign-currency issuer default rating at A+ with a stable outlook, delivering a vote of confidence in the Kingdom’s balance sheets despite the economic fallouts of the US-Iran war.

Inflation remains under control: BMI expects consumer price growth to edge higher as demand improves in 2H, but staying around low levels. Inflation is forecast to remain modest at around 2% this year, suggesting price pressures will stay contained.

A sharp round is expected: GDP growth is expected to accelerate to 6.8% in 2027, according to Saleh, driven by higher oil production as supply constraints ease. Stronger investments, exports, and consumer spending are also expected to support growth as regional conditions stabilize.

Government spending is widening the deficit — for now: The kingdom is expected to post a fiscal deficit of around 6% of GDP in 2026, despite higher oil prices and uninterrupted crude exports through the Red Sea. The shortfall reflects elevated current and capital spending, including higher military expenditure.

But public finances remain sound: Rising oil production and more normalized government spending will narrow the fiscal deficit to 4.2% of GDP in 2027. Public debt is projected to rise from 30% of GDP currently to just under 40% by 2030, remaining low by both regional and international standards.

Sizable financial buffers: Authorities have already secured most of their financing needs in 2026, while substantial foreign exchange reserves and the Public Investment Fund’s assets continue to provide a strong external cushion. The current account is expected to remain balanced this year before slipping into only small deficits in 2027.

Diversification cushions the oil drag: “Lower oil prices will create some headwinds, but these are going to be partly offset by higher oil production, stronger non-oil exports, and continued growth in tourism, logistics, and other services sectors,” Salah said. Rather than slowing reforms, the conflict appears to be sharpening the kingdom’s investment priorities, as some projects generate stronger economic returns, boost exports, and create jobs, with sectors such as AI, rare earths, and advanced manufacturing becoming more important.

Beyond prolonged disruption in the Strait of Hormuz, the main downside risk is possible threats to Saudi oil exports through the Red Sea, especially amid rising tensions with the Houthis, who have increased pressure to seek economic concessions. “The Houthis are increasing the pressure because they are feeling the pressure internally to get more economic concessions from Riyadh, especially the resumption of oil exports in Yemen, and to have a share of these revenues,” head of country risk Remona Mubarak says.

Even so, diplomacy is expected to prevail: Both sides have strong incentives to avoid broader escalation. “Saudi Arabia does not want another front at its border. And this is especially to preserve its access to the Red Sea and all the oil that has been flowing in that region,” Mubarak says.