Saudis See Deeper Deficit as Wartime Spend Offsets Oil Spike

Saudi Arabia increased its projected budget deficit for the year as it steps up spending to mitigate the fallout from the ongoing regional war and progress its economic diversification.

The Ministry of Finance expects a fiscal shortfall of 4.9% of gross domestic product this year, deeper than a prior forecast for 3.3%, according to a statement on Wednesday. That’s still an improvement from 2025 as a spike in oil prices boosts oil income and Riyadh benefits from record non-oil revenue.

Expenditure is seen higher than estimated at 1.4 trillion riyals ($380 billion) for 2026, with the kingdom spending more on defense and infrastructure to stimulate the economy.

Revenue is projected to increase to 1.2 trillion riyals this year as Brent crude trades near $100 a barrel. For 2027, the budget deficit is seen narrowing to 3.6% amid a slight increase in revenues and dip in spending levels.

The fresh projections show Saudi Arabia is willing to continue supporting growth with elevated spending, while promising to keep budget deficits contained over the medium term, according to Mohamed Abu Basha, head of macroeconomic analysis at investment bank EFG Hermes.

On the economy, Saudi Arabia said it expects real GDP to contract 3.6% this year, versus an earlier outlook for growth of 4.6%. The downward revision is driven by expected declines in oil activities amid the US-Iran war and may be followed by a sharp rebound in 2027.

Mideast Oil Flows Soar Near Pre-War Level With Crude Around $100Houthi Strikes, Pipe Closure Mark Crisis for MBS and SaudisSaudis Explore About $8 Billion in Loans as War Strains FinancesSaudi Arabia Sells $3.25 Billion of Debt as Hormuz Tensions Rise

Almost all Gulf Arab states will see their economies contract or slow substantially this year, according to Bloomberg surveys, with Iran’s attacks damaging their infrastructure and its strikes on vessels in the Strait of Hormuz effectively closing the vital waterway for many months.

Saudi Arabia was attacked many times by Iran and Tehran-backed militias in Iraq during the height of the war in March and April. In recent months, the Houthis — an Iran-backed group based in Yemen — have regularlyfired missiles and drones at the kingdom.

The country’s GDP suffered its steepest contraction since the Covid-19 pandemic last quarter and crude production has plunged to the lowest in decades amid the hostilities.

Saudi Arabia’s ability to re-route crude flows, coupled with a surge in global oil prices, has helped offset the impact. The kingdom’s crude revenue reached the highest in almost two years in the second quarter.

That is affording the government more space to spur the economy during a time of war, while also advancing Crown Prince Mohammed bin Salman’s multi-trillion dollar diversification agenda.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, sees stronger spending than the government has forecast and thus projects a bigger deficit. She estimates a shortfall of 5.6% of GDP, just shy of the level seen in 2025.

The kingdom plans to continue borrowing in public and private markets to plug its fiscal deficit and said it remains flexible in its ability to adjust spending to face economic and geopolitical changes.