Saudi Arabia 's public finances are facing unprecedented dual pressures, with official data revealing that the fiscal deficit in this year's first-quarter budget widened to $33.5 billion (125.7 billion riyals), more than double the deficit recorded in the same period last year.
The increase resulted from a sharp 20% rise in government spending, with expenditures reaching $103 billion, driven by the need to meet strategic requirements and emergency military spending amid ongoing regional tensions and the closure of the Strait of Hormuz. Despite the significant rise in global oil prices, Saudi oil revenues contracted by 3%, reflecting the widening gap between market prices and the ability to deliver shipments to global markets.
According to analysts, this places the Saudi treasury before a real test regarding the sustainability of this expansionary spending pattern under existing export constraints.
While Riyadh succeeded in rerouting a large portion of exports through the East-West pipeline to Yanbu Port on the Red Sea, analyses show that the pipeline's operational capacity ceiling prevents the kingdom from fully benefiting from the "risk premium" that pushed Brent crude prices higher.
Analyses also show that shipping, insurance, and war-risk premiums are consuming a large share of net returns, meaning the budget is not effectively benefiting from oil prices above $110 per barrel, despite the government's breakeven price being only $94 to cover government spending.
This was according to a report published by the Saudi-focused platform House of Saud on 10 May.
Against this backdrop, credit rating agencies are currently monitoring two critical levels that serve as warning signals of a downgrade of the kingdom's sovereign rating.
The first is a decline in foreign reserves at the Saudi central bank below the $350 billion threshold, a level that could threaten the stability of the riyal peg to the dollar.
The second is an acceleration in public debt growth to exceed 35% of gross domestic product ahead of the planned schedule, according to a Moody's report published on 11 May. Spending surge In this context, economist and financial adviser Ali Ahmed Darwish told The New Arab that the 20% surge in Saudi budget spending was due to the direct repercussions of the US-Israeli war on Iran .
He explained that if this reality continues and the conflict is prolonged, spending is expected to remain elevated to meet the requirements of the current stage, at a time when revenues face major challenges, particularly with the closure of the Strait of Hormuz disrupting oil income flows.
Despite the imbalance between revenues and expenditures under the current circumstances, the kingdom's credit rating of "A+" remains among the highest globally, according to Darwish.
He explained that the rating is supported by high liquidity and massive financial reserves, therefore giving the Saudi economy resilience and a strong ability to absorb shocks and continue operating amid turbulent regional conditions.
Darwish, therefore, does not expect credit rating agencies to downgrade Saudi Arabia in the foreseeable future, given the ability of large reserves to cover the deficit and ensure financial stability.
According to his assessment, this reflects the resilience of the Saudi economy and its ability to maintain financial credibility despite current geopolitical challenges. Growing deficit Meanwhile, economist Rabie Badwani Makhlouf told The New Arab that the Saudi economy has a notable ability to absorb short-term shocks resulting from the US-Iran conflict and disruption to navigation in the Strait of Hormuz .
However, he said that a prolonged crisis would impose mounting pressure on public finances and the kingdom's credit rating.
The Saudi fiscal deficit rose in the first quarter of this year due to a 20% increase in government spending, driven by defence and security expenditures, transport and insurance costs, and export rerouting.
Meanwhile, the "geopolitical risk premium", which kept oil prices between $90 and $110 per barrel, mitigated the impact of declining export volumes, as Makhlouf explained.
The kingdom partially relies on the East-West pipeline, which extends to Yanbu port on the Red Sea, to divert some exports away from the Strait of Hormuz . However, its operational capacity does not fully compensate for Gulf export capacity in the event of a continued full closure.
According to Makhlouf's assessment, this makes alternative infrastructure a decisive factor in the financial stability equation.
Makhlouf pointed out that Saudi Arabia can withstand the current spending surge for between six and 12 months without entering a severe financial crisis.
This is due to foreign reserve assets rising to around 1.86 trillion riyals in March, along with the kingdom's strong access to debt markets and support from sovereign wealth funds, foremost among them the Public Investment Fund, whose assets exceed $900 billion.
However, continued elevated spending alongside disrupted oil exports would gradually lead to increased government borrowing, higher public debt-servicing costs, pressure on Vision 2030 projects, and slower non-oil growth.
Makhlouf said this requires close monitoring of fiscal sustainability indicators to avoid long-term negative repercussions.
He warned that credit rating agencies such as Moody's and Fitch may begin reviewing the kingdom's rating if export disruptions continue for more than a year, if alternative infrastructure comes under security pressure, if public debt rises rapidly, or if foreign reserves decline in a way that threatens riyal exchange-rate stability and investor confidence. Article translated from Arabic by Afrah Almatwari. To read the original, click here .