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Saudi Arabia will keep borrowing next year to fund its economic transformation as it sees returns on domestic investments outweighing borrowing costs, Finance Minister Mohammed Al-Jadaan said. Those additional deficits come even as the 2026 budget, released Tuesday, turns less expansionary, with overall spending and capital expenditure to be cut for a second consecutive year.
The kingdom projects spending of 1.3 trillion riyals ($350 billion) next year, with slightly higher revenues than 2025, leaving a deficit of 120 billion riyals. Economic growth is forecast at 4.6% in 2026, with a recent Purchasing Managers Index, a survey of business activity, recording the second highest level in over a decade, indicating a strong outlook for non-oil growth. Spending is projected to pick up again in 2027 and 2028, according to the forecast.
“The policy choice is we need to invest in our economy and its diversification to enable the private sector,” Al-Jadaan said at a briefing this week. “So long as the return on these investments is higher than the cost of the debt, we will continue that drive for the foreseeable future.”
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Matthew’s view
Riyadh still has ample room to borrow — its debt-to-GDP ratio is expected to hit 33% next year, among the lowest in the world’s top 20 economies — and the government is increasingly turning to private debt placements in order to avoid crowding out other state-controlled borrowers like the Public Investment Fund, its sovereign wealth vehicle, and Saudi Aramco that are also tapping the bond market. Saudi borrowers are among the largest emerging-market issuers of debt this year, according to Fitch Ratings.
The government will need to raise more foreign cash next year because local banks are increasingly squeezed after funding domestic projects, and they are also borrowing to extend credit in the kingdom.
Saudi Arabia’s budget is closely watched by everyone from commodity traders to local businesses looking for clues about the government’s oil price expectations and how that will trickle down into the economy and impact government borrowing. Capital Economics estimated that 2026 revenue projections were based on an average oil price of $68 a barrel, and that the Saudi deficit could be significantly wider than government forecasts based on its analysts’ assumptions that crude will slide toward $50 a barrel by the end of 2026.
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Saudi Arabia is borrowing to fund an economic diversification program under Crown Prince Mohammed bin Salman that aims to break a historic reliance on its crude exports. Oil revenue is forecast to make up 54% of government income this year, the lowest portion since 2020 when crude prices crashed during the COVID-19 pandemic.
“Oil is still very important for us, but we wanted to decouple the economy from the oil activity — and that’s really been proven,” Al-Jadaan said. Oil’s contribution to the economy since 2017 has been “stagnant,” while the non-oil sector had grown more than 5% a year on average over the same period, he said.
That growth has been driven by measures including easing the business environment in the kingdom, attracting foreign investment, but also by huge state spending by the government and PIF on diversification projects. PIF has previously said it plans to boost domestic spending next year, although it has also been reviewing its own plans and trimming budgets for flagship projects.
Notable
- Saudi Arabia’s 2026 budget signals a tighter fiscal stance after a sharp widening of the deficit in 2025, highlighting the vulnerability of public finances to lower oil prices, Fitch Ratings said in a report.