Brent oil prices have declined by 20% over the past week and are currently trading around $60 per barrel, their lowest level since early 2021. This price decline has been driven by concerns about the impact of escalating tariffs on the global economy and by the OPEC+ decision to increase production by more than had been expected.
Larger Fiscal Deficit
If sustained, the decline in oil prices will have significant implications for the Saudi fiscal position. The 2025 government budget expected a fiscal deficit of $27 billion or 2.3% of gross domestic product. If oil prices were to average $65/bbl in 2025, the deficit would likely be around $56 billion or 5.2% of GDP. At $60/bbl, the deficit would be $62 billion or close to 6% of GDP. Both these calculations assume that oil production averages 9.2 million barrels a day in 2025 and that the ambitious spending cuts outlined in the budget (which have spending declining by 6.5% relative to the 2024 outcome) are achieved.
More Borrowing
A higher deficit will mean more government borrowing. The 2025 “Annual Borrowing Plan” published by the National Debt Management Center set out a 2025 borrowing need of $37 billion. This comprised financing to meet the budget deficit plus the replacement of outstanding debt that is maturing this year. The broad guidance given in the plan was that borrowing would come from domestic debt capital markets (up to 25%), international debt capital markets (up to 45%), and private funding sources, such as loans from banks (up to 30%). Assuming that international bond issuance was targeted at the full 45% allocation, this would have implied issuance during 2025 of $17 billion. The government issued $14.5 billion of international bonds in the first two months of the year and so had appeared well on the way to meeting its 2025 financing needs.
With a higher deficit now likely, financing needs have increased. Total financing needs would be $72 billion at a $60/bbl oil price. Sticking to the 45% share from international debt capital markets, this would imply issuance of close to $32 billion in 2025 and issuance during the rest of the year of around $18 billion. Given Saudi Arabia still has a strong fiscal position, financing a larger deficit will not be a problem, although in a lower oil price environment it is likely that lenders will require a higher interest rate to buy the debt than they did earlier this year.
Other Options
Rather than borrowing more, the government could try and compensate for lower oil revenue by cutting spending more than budgeted or by raising additional non-oil revenue. As mentioned, the budget already assumes a spending cut of 6.5% relative to 2024. Achieving more than this will be challenging but could perhaps be achieved by further scaling back capital expenditure ambitions this year. New non-oil revenue measures could also be considered, including introducing taxes on property or personal incomes or raising the value-added tax rate. None of these, however, are likely to be introduced in the near term, particularly if the government views the recent drop in oil prices as temporary.
Economic Impact
The Saudi economy has been growing strongly in the first months of 2025. If lower oil prices result in cuts in government spending (and lower investment by the Public Investment Fund), this will likely lead to slower growth in the non-oil economy. In turn, employment is likely to decline, with expatriates particularly affected. Expatriate employment rose by 1.4 million in 2024 as Vision 2030 projects moved ahead, but any slowdown in spending will see some of these job gains reversed.
