Investing.com — Saudi Arabia’s financial markets face a challenging outlook as the nation faces the prospect of an ‘oil winter’.
Analysts at BCA Research say the kingdom’s economy, still deeply tied to revenue, is vulnerable to expected declines in global oil prices and a slowdown in nominal growth.
While efforts under Vision 2030 have boosted domestic demand through diversification, the broader economic picture remains precarious.
Over the past year, Saudi Arabia has made strides toward reducing its dependence on oil exports, as evidenced by a 4.4 percent increase in real domestic demand despite falling oil revenues.
Infrastructure investment and borrowing, both domestically and internationally, have been instrumental in sustaining consumption and business activity.
However, overall GDP growth has lagged, slipping into negative territory in 2023-24 as oil export revenue, a critical component, has declined.
The connection between oil prices, nominal GDP and the stock market is particularly strong. Saudi shares, more aligned with the health of the broader economy than domestic consumption, are likely to struggle if crude oil prices weaken further.
BCA Research forecasts that global crude demand will remain subdued in 2025 due to slowing global growth, keeping oil prices under pressure.
Additionally, Saudi Arabia’s cautious production stance – aimed at avoiding an oversupplied market – means the kingdom’s oil revenues will likely continue to face headwinds.
Fiscal policy adds another layer of uncertainty. The proposed 2025 budget includes significant spending cuts of 4.5% from 2024 levels, a move aimed at curbing the rise in public debt.
However, this fiscal restraint risks stifling domestic liquidity and economic activity. Saudi Arabia’s high borrowing costs, linked to the US Federal Reserve’s interest rate policies due to the currency peg, are exacerbating economic stress, curbing credit growth and private sector investment.
Public debt, meanwhile, has risen, rising from $12 billion in 2014 to $306 billion in 2024, now accounting for 28% of GDP.
This trajectory is unlikely to reverse anytime soon, given the twin pressures of weak oil revenues and ongoing Vision 2030-related spending.
For investors, the outlook is cautious. BCA Research recommends maintaining a neutral stance on Saudi equities in emerging market portfolios, reflecting skepticism about the market’s ability to outperform amid these challenges.
Similarly, Saudi sovereign credit has been downgraded from overweight to neutral due to rising debt levels and widening credit spreads relative to emerging market peers.
