Saudi Arabia Sticking to Spending, Borrowing Plans

Saudi Arabia will sustain roughly SAR 1.3 trillion of spending over the next couple of years to press ahead with Vision 2030 despite weaker oil export revenues (noted as the lowest since 2021 in May). The budget is expected to widen to over 5% of GDP in 2025 before narrowing to about 3.3% in 2026 and closer to 2% thereafter; the finance minister said the government will reprioritise, accelerate, defer or cancel projects that do not align with the strategy and the sovereign investor (PPIF) is revising its 2026 investment priorities.

Analysis

Market structure: Continued 1.3 trillion SAR spending and a deliberate choice to run deficits (peak >5% of GDP in 2025, falling to ~3.3% in 2026 and ~2% thereafter) favors domestic-facing sectors — construction, tourism/entertainment, infrastructure-related services, and Saudi banks that will intermediate higher government borrowing. Oil exporters and any firms whose revenue is tied to commodity-linked fiscal transfers face tighter margins as sovereign borrowing substitutes for oil income. Bond supply will increase (sukuk/Eurobond issuance), pressuring yields unless PIF asset recycling offsets issuance.

Risk assessment: Tail risks include a sovereign-rating downgrade (low-probability but high-impact), sudden oil-price shock (Brent < $60 for >3 months), or PIF liquidity constraints forcing asset fire-sales. Immediate (days) risks: volatility around sovereign issuance and PIF announcements; short-term (weeks–months): contractor repricings/cancellations; long-term (quarters–years): success/failure of diversification altering sovereign cashflows. Hidden dependency: fiscal plan hinges on PIF reprioritisation and global credit conditions; catalysts: PIF roadmap release, rating-agency updates, and oil-price moves.

Trade implications: Tactical overweight Saudi equities (domestic cyclicals and banks) and underweight tradeable sovereign duration; use 6–12 month instruments to capture policy continuity. Buy-call spreads or long-dated calls on KSA to express upside while capping premium; hedge macro risk with CDS or short-duration EM sovereign bonds if spreads widen >25bp. Rotate away from international EPCs with concentrated Saudi revenue exposure and toward listed tourism/leisure and financials.

Contrarian angles: Consensus focuses on fiscal strain; markets may underprice the upside from accelerated privatizations and PIF-led M&A — potential catalysts for equity re-rating if asset sales/IPO plans materialize within 6–12 months. Conversely, project cancellations create idiosyncratic losers (contractors) while improving sovereign ROI — a scenario where selective corporate shorts and sovereign-protection buys both pay off.

Key Decisions for Investors

• Establish a 2–3% portfolio long in iShares MSCI Saudi Arabia ETF (KSA) over 6–12 months to capture domestic fiscal lift; hedge with a 0.5% notional 6-month put ~10% OTM to limit downside if oil falls below $60 for 3+ months.
• Initiate 1% positions each in large Saudi banks (e.g., Al Rajhi 1120.SR, National Commercial Bank 1180.SR) to play loan growth from fiscal spending; take profits or cut if quarterly NPLs rise >1ppt or NIMs compress >50bps.
• Buy 6–12 month call spreads on KSA or large-cap Saudi tickers (buy ATM, sell 15–20% OTM) sized to 0.5–1% of portfolio to capture upside from PIF reprioritisation announcements while limiting premium outlay.
• Purchase sovereign-protection: add short-duration EM sovereign bond exposure or buy Saudi CDS protection sized to 0.5–1% notional if Saudi EUR/sukuk spreads widen >25bps vs 30-day average; this caps tail sovereign risk during elevated issuance.
• Reduce/avoid exposure to international EPC/construction suppliers with >30% revenue from Saudi mega-projects; reallocate proceeds to Saudi leisure/tourism equities and bank exposure within 60–90 days as project reprioritisation clarity emerges.