Saudi Arabia

Lower interest rates and investments will drive growth in 2025

In 2025, a more accommodating monetary policy and increased oil production are anticipated to bolster growth. Lower interest rates in line with the US Fed’s rate cuts will reduce credit costs and stimulate investment (accounting for nearly 30% of GDP). Furthermore, the country's sovereign wealth fund (the Public Investment Fund oversees an estimated USD 925 billion) has announced plans to lower international investments from 30% to 18%-20% of its total investments and increase domestic investments, indicating that investments will be a primary driver of growth in 2025. Low inflation, declining interest rates and strong consumer sentiment will ensure that private consumption (40% of GDP) remains robust. In line with the objectives set out in Vision 2030, increased government investment in mega projects (i.e. Neom Project, Diriyah Gate etc.) will also provide a boost to growth. Following a contraction of close to 5.5% in 2024, Saudi Arabia's oil production is expected to increase by close to 3% in 2025, which is in line with the OPEC+ strategy of gradually increasing oil production in 2025. The positive contribution of net exports to growth will persist, albeit at a reduced level, as demand for capital goods, raw materials and machinery rises in line with increased infrastructure investments, leading to an uptick in imports.

Strong economic growth and a slightly looser fiscal policy will exert slight upward pressure on inflation. Similarly, the gradual recovery of the tourism sector (tourism revenues are projected to reach USD 25 billion in 2025, representing approximately 2.5% of GDP) and the strength of demand for housing could maintain rental inflation at a relatively high level. Nonetheless, the overall level of inflation is expected to remain low, enabling the central bank to continue the rate-cutting cycle initiated in September 2024.

Wider fiscal deficit, narrower external surplus

The budget deficit is projected to increase in 2025 due to lower oil prices and continued investment spending under Vision 2030, which is the name of the plan to diversify the economy away from oil. Despite the anticipated increase in oil production, these oil prices will result in reduced budget revenues – oil revenues account for approximately 55% of fiscal revenues. This will not be compensated by non-oil fiscal revenues generated by the non-oil economy or by increased investment and private consumption. The budget deficit is to be financed through a combination of domestic and foreign debt. The country's low debt level means it will be able to secure a high number of subscribers for its debt issuances. Furthermore, should geopolitical tensions in the Middle East result in disruptions to global oil shipping routes, this could lead to an increase in oil prices, which would have a positive impact on Saudi Arabia's budget revenues.

Despite an increase in non-oil exports, the current account surplus is expected to narrow in 2025 due to weaker energy prices, which account for approximately 70% of total merchandise exports. It is unlikely that the gradual increase in oil production will be sufficient to offset the impact of lower energy prices. In addition, imports are expected to continue rising, driven by investment-related capital goods imports and resilient domestic demand.

A sustained growth in non-oil commodity exports (including mineral products, chemicals and plastics, etc.) will also contribute positively to the surplus. However, any decline in demand from China, the Kingdom's largest customer, would present challenges to further export growth. Expansion of the tourism sector would also serve to sustain the current account surplus. Although the current account surplus-to-GDP ratio is expected to remain below the 2010-2019 average of 9.5%, the nation's external reserves will remain strong, with a coverage ratio approaching 14 months of imports (in October 2024, international reserves stood at approximately USD 434 billion).

Shifting regional balances and diversification efforts

In 2025, Saudi Arabia will be facing several challenges to maintain stability and growth in the face of a changing global and regional landscape. The country has made significant progress in its Vision 2030 goals, but there are still quite a few hurdles to overcome to achieve a sustainable balance between modernisation and tradition, economic diversification, and the handling of regional conflicts and global geopolitical shifts. The collapse of the Assad regime in Syria in December 2024 is likely to shift the regional balance of power, which could have both positive and negative implications for Saudi Arabia. On one hand, the potential weakening of Iranian influence and the resulting opportunities for Saudi involvement in Syria's reconstruction are positive factors. Conversely, it could result in heightened instability and security risks, particularly from extremist organisations. Israel's continued reluctance to accept the creation of a Palestinian state may present a significant challenge to securing the normalisation of bilateral relations. This has been a recurring demand from Saudi Arabia and could potentially lead to increased domestic tensions within the Kingdom, given the broad support for the Palestinian cause.

Last updated: December 2024