Economy weathers geopolitical shock, but risks persist, Moody’s VP says

The Saudi economy entered a more complex phase in 2026, with recent data showing real GDP contracted 4.8% y-o-y in 2Q — marking its steepest decline since the fallout from the Covid-19 pandemic — amid regional disruptions that directly affected oil production and export flows. Meanwhile, forecasts from international institutions don’t point to a prolonged economic crisis, but rather to a temporary shock that could be followed by a strong recovery if geopolitical tensions ease and energy and trade flows return to normal. We spoke to Moody’s Vice President Aurelien Mali about how the crisis will take shape in the coming months. Edited excerpts from our conversation:

E: Do you believe international investors increasingly view Saudi as a relative haven within the region, or do geopolitical risks continue to outweigh the investment potential?

Aurelien Mali: On balance, international investors appear to view Saudi Arabia as a relative haven within the Gulf during the current crisis, provided there is no renewed regional escalation or significant damage to major oil, gas, or civilian infrastructure. This reflects comparative resilience rather than immunity, and the premium would likely erode if geopolitical and disruption risks persist.

Saudi Arabia has proven relatively less dependent on the Strait of Hormuz than its Gulf peers — unlike Qatar, Bahrain, or Kuwait, it can reroute a substantial share of crude westward via the East-West pipeline to Yanbu on the Red Sea, preserving meaningful export capacity through the crisis.

But this resilience is partial and likely temporary. The Red Sea alternative merely shifts chokepoint risk toward the Bab Al Mandeb Strait and the Houthi threat, pipeline pumping stations remain exposed to attack, and terminal throughput caps the volumes that can realistically be diverted. Saudi Arabia’s export optionality is therefore a real credit differentiator versus Hormuz-locked sovereigns, but its buffer would erode the longer the conflict persists, especially in a scenario of renewed escalation.

E: Do you expect the Kingdom to accelerate investment in alternative energy and export infrastructure?

AM: The current conflict is likely to encourage further investment in alternative trade routes across the region, including possible expansion of Petroline and Yanbu capacity, reinforcing the Kingdom’s relative position in the Gulf. Vision 2030 should also continue to support diversification into non-oil revenue, renewables, and downstream activities, although fiscal pressures and competing gigaproject commitments may constrain the pace.

E: Can you tell us about Moody’s outlook for the Saudi economy?

AM: The stable outlook on the Kingdom’s Aa3 ratings reflects Moody’s expectation that Saudi Arabia's credit profile will remain resilient to the ongoing regional conflict. This is supported by the country’s established alternative routes for its oil exports and its large fiscal buffers, which we estimate at 18% of GDP in 2025.

At the same time, Saudi Arabia's exposures to hydrocarbon sector volatility and to regional geopolitical risks are likely to persist for the foreseeable future. Risks around our baseline remain broadly balanced. Further progress in implementing large diversification projects may crowd in private-sector investment and accelerate the development of the non-hydrocarbon economy.

However, the regional conflict is likely to delay parts of this diversification agenda. A large and durable decline in oil prices in the medium term could intensify the trade-off between advancing economic diversification and maintaining fiscal prudence, potentially leading to a weaker sovereign balance sheet than we currently expect.

E: Which sectors do you expect to drive growth, which are most vulnerable to a slowdown, and why?

AM: Non-oil activity will likely remain Saudi Arabia’s main growth engine, led by services such as tourism and hospitality, entertainment, finance, logistics, and construction, particularly those supported by PIF investments. However, a prolonged regional conflict or escalation could weigh on these sectors.

The economy is also not yet fully decoupled from hydrocarbons. Fiscal funding, domestic demand, and investment still depend significantly on oil revenue and public spending. Over the medium term, carbon transition risks remain a key vulnerability.

Higher oil prices have largely offset lower export volumes in 1H, helping support Saudi Arabia’s public finances and limiting the impact on government revenue, even with some lag. This situation has allowed the government to avoid leaning heavily on its financial assets to support its budget.