Saudi Arabia’s non-oil economy forges onward
3 April 2025
The kingdom’s recent news flow provides a range of indicators offering ammunition for those with both glass half-full and glass half-empty views on the country’s economic prospects.
Saudi decision makers can point to some positive signals that suggest the tapering of oil prices is not putting a major dent into the country’s economic outlook, with the robust non-oil performance giving some comfort to policymakers in Riyadh.
The Saudi Purchasing Managers’ Index recorded its highest level in over a decade in January, as non-oil business conditions improved amid increases in new orders and higher sales volumes.
GDP growth has been solid, despite weaker oil production and prices. According to Al-Rajhi Capital, Saudi Arabia’s real GDP grew by 4.4% year-on-year in Q4 2024 – the highest growth rate in two years – lifted by a 4.6% rise in non-oil GDP, as compared to a 3.4% increase in oil sector GDP.
Consumer sentiment is robust, with spending growing by 11% in year-on-year terms in January, according to Riyadh-based Jadwa Investment.
Balancing the budget
Public finances are the biggest casualty of the deterioration in oil export earnings.
Saudi Aramco’s decision in early March to cut its annual dividend payout will come as a blow to the country’s public finances, as the company confirmed that its payouts will drop by $39bn in 2025 – a 31% decline in year-on-year terms.
According to consultancy Capital Economics, a performance-linked dividend of just $200m will be paid out this quarter, far lower than the $10.8bn distributed in each quarter of 2024, and which, over the year, was equivalent to more than 10% of state revenues.
The worsening finances follow a period when the government was in a stronger position to lean on Aramco’s higher earnings – in 2021-22, when oil prices were soaring. That windfall now appears to have been exhausted, with follow-through for this year’s performance.
With Brent crude averaging around $70 a barrel this year, and potentially slipping to $60 a barrel by the end of 2026, Capital Economics anticipates government revenues being about 4% of GDP lower this year compared to 2024. This implies that the budget deficit will be higher than the 2.3% of GDP forecast in the 2025 budget.
“Going towards a deficit in a range of 5%-6% of GDP will start to raise the alarm bells for the government,” says James Swanston, a senior economist focused on the Middle East and North Africa region at Capital Economics.
“That’s not to say they can’t easily finance that. They’ve got very large assets and they have tapped the international capital markets over the last few years, so if they wanted to issue more debt near-term, that’s not a concern.”
However, more cuts to Aramco’s dividends this year will only add to the pressure on the government to raise borrowing. And relying on borrowing to fill the fiscal gap will contribute to a worsening of the kingdom’s debt-to-GDP ratio, which could rise from 29.6% to over 70% by the end of the decade, according to Capital Economics.
This leaves a mixed economic picture for the kingdom, with oil weakness set against still-resilient non-oil confidence, though the former is also little cause for alarm, according to analysts.
“The budget wasn’t assuming that Saudi Aramco’s performance-linked dividends would still be as big as they were in the second half of 2023 and in 2024. It’s not a shock to the budget plan, and that explains why the revenue projections show a decline in revenue in 2025,” says Toby Iles, chief economist at Jadwa Investment.
“Of course, if you’ve got 3% of GDP less in revenue than in 2024, then that does tighten the budgetary situation year on year. At Jadwa, we’ve forecast a deficit of close to SR130bn ($34.7bn), which is around 3% of GDP. But the government does have fiscal space to go wider than that, if it decides to.”
The other option for the government is to continue to issue debt and make larger cuts to its capital expenditure than those already outlined in the budget. “The authorities will probably be reluctant to cut current expenditure or the public sector, so capital projects may be where the cuts will be,” says Swanston.
There may also be more impetus to raise revenues. Although Saudi Arabia has not set out firm plans, a real estate tax could emerge as one measure that could swell depleting state coffers.
Market sentiment holds
In the meantime, robust bank credit approaching 15% in year-on-year terms, along with a surge in consumer spending, shows that in domestic terms, economic sentiment is still strong.
Structural elements of the budget have also been improving. “Non-oil revenue, for example, now covers 85% of wage spending, whereas in 2016 it covered less than half. That’s almost approaching parity, which is pretty positive,” says Iles.
Jadwa expects real GDP growth of 3.7% in 2025, led by another strong performance by the non-oil sector, the economy’s main growth engine.
This links to a broader question of whether Saudi Arabia’s non-oil growth reflects impetus from the country’s private sector, unaffected by any cyclical retrenchment, or whether the impact of the economic transformation is starting to be felt.
“When you look at the performance of the non-oil sector, you see pretty strong growth across a range of sectors. It’s quite broad based, and links back to the strong consumption trends and the strong investment. And both of those things are, to an extent, linked to Vision 2030 reforms,” says Iles.
If the non-oil vibrance can survive global headwinds, including weaker oil prices, then the government’s insistence on the importance of holding to its ambitious economic transformation agenda may be vindicated sooner than 2030.
MEED’s April 2025 report on Saudi Arabia also includes:
> GOVERNMENT: Riyadh takes the diplomatic initiative
> BANKING: Saudi banks work to keep pace with credit expansion
> UPSTREAM: Saudi oil and gas spending to surpass 2024 level
> DOWNSTREAM: Aramco’s recalibrated chemical goals reflect realism
> POWER: Saudi power sector enters busiest year
> WATER: Saudi water contracts set another annual record
> CONSTRUCTION: Reprioritisation underpins Saudi construction
> TRANSPORT: Riyadh pushes ahead with infrastructure development
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