Saudi Arabia's Financial Market Outlook

Saudi Arabia's financial markets are facing a challenging outlook amid the potential for an "oil winter."

Analysts from BCA Research highlight the kingdom’s economy's vulnerability due to its deep tie to crude oil revenues, particularly in light of declining global oil prices and slowing nominal growth.

While Vision 2030 has helped boost domestic demand through diversification, the overall economic situation remains precarious. Over the past year, efforts to reduce reliance on oil exports have resulted in a 4.4% growth in real domestic demand, despite plummeting oil revenues.

Key infrastructure investments and borrowing, both domestically and internationally, have supported consumption and business activity. However, overall GDP growth has dropped into negative territory in 2023-24, primarily because of faltering oil export revenues.

The link between oil prices, nominal GDP, and the stock market is clear. Saudi stocks tend to perform poorly when oil prices decline, as they are more affected by the overall economy than by domestic consumption.

BCA Research anticipates that global crude demand will remain subdued in 2025, which will likely keep oil prices under pressure. Additionally, Saudi Arabia's cautious approach to oil production aims to avoid market oversupply, suggesting ongoing headwinds for oil revenues.

Fiscal policies contribute further uncertainty, as the proposed 2025 budget suggests significant expenditure cuts of 4.5% from the previous year to mitigate the increasing public debt. However, this restraint could suppress domestic liquidity and economic activity.

The kingdom's borrowing costs are compounded by U.S. Federal Reserve interest rate policies associated with the currency peg, putting pressure on private-sector credit growth and investment.

Public debt has surged from $12 billion in 2014 to $306 billion in 2024, now constituting 28% of GDP. This upward trend is unlikely to reverse soon due to weak oil revenues combined with ongoing Vision 2030 expenditures.

For investors, the outlook remains cautious. BCA Research advises maintaining a neutral stance on Saudi equities in emerging market portfolios, reflecting doubts about the market’s capacity to outperform amid these adversities. Similarly, Saudi sovereign credit ratings have been downgraded from overweight to neutral because of rising debt levels and increasing credit spreads when compared to emerging market counterparts.