Saudi forced to step up austerity as low oil prices bite

Following the publication of Saudi Arabia's full 2026 Budget today, we have provided this updated analysis 

• Saudi Arabia officially approved its 2026 Budget earlier today and, while the headline figures were unchanged from the Pre-Budget Statement, the details confirmed that a period of fiscal consolidation lies in store. That said, we think the authorities will struggle to narrow the budget deficit next year and, as a result, the debt ratio will continue to climb.
• Compared to the Pre-Budget Statement, today’s approval and publication of the Budget provided key details related to the government’s revenue and expenditure plans. Spending is projected to be 1.7% weaker than what is expected to be realised in 2025. The public sector wage bill, social benefits, and debt financing expenses are all projected to rise. These are expected to be more than offset by sizeable cuts to spending on goods and services, subsidies and capital expenditure. The latter is projected to be reduced by nearly 6% having already been cut by 10% in 2025, after officials announced plans to pare back spending on gigaprojects.
• On the revenue side of the equation, revenues are projected to rise by 5.1% in 2026 compared to this year. Non-oil revenues are estimated to rise by 4.8% thanks to modest increases in income, corporate, capital gains, tariffs, and VAT receipts. Meanwhile, “other revenues” which is largely composed of oil receipts are also expected to rise. That said, we estimate that the 2026 Budget is premised off of lower oil price of ~$68pb compared to the $70pb realised this year. Officials are banking on higher oil output to raise oil receipts.
• All told, the key takeaway is that a combination of higher taxes and lower spending means that fiscal policy will be tighter next year. The non-oil budget deficit would be roughly 1.5% of non-oil GDP smaller in 2026 than it was this year. That will weigh on non-oil activity over the coming quarters. That said, we doubt that this degree of fiscal consolidation will be enough to narrow the headline budget deficit. Oil prices currently stand at $62pb and with OPEC+ set to resume oil output hikes from Q2 next year, the market surplus will grow and we expect the price of Brent crude to slip back toward $50pb by end-2026. If we’re correct, the budget deficit is likely to be closer equal to 6.0% of GDP (vs. the government’s projection of 3.3% of GDP). That is likely will result in a faster climb in the public debt-to-GDP ratio toward 40% (from 31% currently) over the next year or so.