Saudi’s economic transformation collides with war and falling FDI

Saudi Arabia's economy is facing challenges as foreign direct investment (FDI) drops 18% in the second quarter, falling to SAR 22.3 billion ($5.95 billion) compared to the first quarter. The decrease is attributed to the ongoing U.S.-Iran war, which is causing international investors to become more cautious. Saudi Arabia aims to attract $100 billion in annual FDI by 2030 as part of its Vision 2030 economic transformation plan, which seeks to reduce the fiscal burden on the government and the sovereign wealth fund, PIF, while fostering private sector growth and job creation.

However, Saudi banks have lent 18.4% more to state-owned companies in August compared to the 6% growth seen in the private sector. The Finance Ministry recently revised its 2026 budget deficit estimate to SAR245 billion (4.9% of GDP) from the initial SAR165 billion (3.3%) projection, due to spending exceeding revenue estimates. Moody's has acknowledged that the recalibrated Vision 2030, which now prioritizes projects with strong returns and capital efficiency, can help alleviate the pressure on public finances.

Nonetheless, the country still faces risks from volatile oil prices and export capacity, with real GDP expected to decline by 3.3% this year due to ongoing disruptions in oil trade flows. Saudi Aramco's CEO, Amin Nasser, has highlighted that the U.S.-Iran war has reduced regional oil supply by nearly 3 billion barrels, and oil stockpiles are now at a concerning level.

Recently, Yemen's civil war has escalated, with Saudi-backed forces retaking strategic positions along the western coast and the Houthis retaliating with missile and drone attacks against Saudi targets. In response, Turkey, Pakistan, and Saudi Arabia agreed to deploy forces to Saudi Arabia following an emergency meeting in Riyadh, marking the first use of the Mecca Alliance for Defense since its establishment.