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Conflict bolsters case for Saudi economic diversification

7 September 2026

 

Billions of dollars’ worth of deals were announced at the Leap technology conference in the Saudi capital in late August and early September – a welcome fillip for an economy that is struggling to deal with the effects of the Iran war.

Among the biggest deals unveiled at the Riyadh Exhibition & Convention Centre were a $1.2bn investment in data centres by the local Al-Moammar Information Systems and an $880m commitment from NHC Innovation to develop data centres in Khuzam Digital Valley, to the north of the capital. There were numerous other, smaller financing commitments around cloud services, artificial intelligence (AI), and research and development centres.

Technology is a priority area for the Saudi government’s economic diversification efforts and, for now at least, the indicators are moving in the right direction. The Public Investment Fund’s AI subsidiary, Humain, has been particularly active in striking deals, and other bodies are also throwing their weight behind the sector. A few days before Leap got under way, the Royal Commission for Riyadh City launched the Riyadh Digital Innovation District, aimed at turning the capital into a technology and innovation hub.

Economic strains

The wider economic picture is, however, far more mixed. Figures issued by the General Authority for Statistics in mid-August revealed a 4.8% contraction in GDP in the second quarter of the year, compared with the same period a year earlier. The decline was driven by a 25% contraction in the oil sector.

Hydrocarbons remain the central pillar of the Saudi economy, and the Iran war has placed it under enormous pressure, with exports through the Strait of Hormuz difficult – if not impossible – for much of the past six months. The alternative route via the Red Sea has its own difficulties, thanks to Houthi attacks on shipping around the Bab El-Mandeb strait. As a result, Saudi oil cargoes heading to Asia are being diverted via the Suez Canal and around Africa – a route that adds weeks to the journey.

Lower oil revenues weaken the state’s fiscal position and are leading to larger budget deficits, which need to be funded through other means. On 1 September, the National Debt Management Centre (NDMC) announced it had sold $3.25bn-worth of sharia-compliant bonds (sukuk) to international investors. It said it had received orders for $16.5bn, indicating there remains strong appetite among overseas buyers.

In May, the NDMC said it had secured around 90% of the government’s funding needs for the year, even before the euphemistically named “geopolitical events” had broken out. It added at the time that, should additional financing be needed, it would turn to “private channels and local markets” as the main funding sources, while also monitoring international markets to see if “favourable opportunities arise”.

One positive element amid the gloom is that the non-oil private sector has proved relatively resilient and has continued to grow for most of the time since the war began in late February. The purchasing managers’ index (PMI) survey compiled by Riyad Bank shows the non-oil sector expanded each month from April to August. Reviewing the latest PMI data, Naif Al-Ghaith, chief economist at Riyad Bank, said it expected the Saudi non-oil economy to “maintain solid growth momentum through the second half of the year”.

However, there are warning signs. Job creation is relatively weak, and business confidence is fragile: in the August PMI survey, only one in five respondents said they expected increased activity over the next 12 months.

Other data points offer further reasons for caution. Saudi bank deposits fell slightly in July to SR3.11tn ($820bn) – the first drop since October last year – according to data from the central bank.

Exports are also struggling due to higher transport costs. Saudi Arabia’s total exports were 10% lower in the second quarter of the year than in the first. The government is reportedly weighing a scheme to reduce insurance costs for shipping companies in an effort to bolster exports, but Oxford Economics said it expects the kingdom’s exports “to remain weak through the rest of this year”.

Perhaps the biggest risk is uncertainty. The Iran conflict was relatively muted through much of August, but flared again in early September when Tehran and Washington exchanged fire. Saudi Arabia has not suffered as many hits from Iranian missiles as Bahrain, Kuwait or Jordan, but that could change.

Investor test

Against that backdrop, the push for economic diversification is as strong as ever. The Leap technology conference in August offered a sense of how things could develop. The Future Investment Initiative (FII) event in October will provide another litmus test of international investor appetite.

Riyadh is trying to build momentum ahead of the event, releasing a list of speakers in late August that included BlackRock chief executive Laurence Fink, Goldman Sachs chief executive David Solomon and JPMorgan Chase chief executive Jamie Dimon.

The past nine editions of FII have been a stage for billions of dollars in investment pledges – more than $50bn-worth of agreements were announced at last year’s event – but none has taken place against such a difficult geopolitical and macroeconomic backdrop. Riyadh’s policymakers will be hoping investors can look past the current crisis and provide further fillips for the economy.

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Dominic Dudley

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