Saudi Arabia: Capital, Constraint, and the Next Phase of Vision 2030

Overview

Saudi Arabia is moving into a more mature and selective phase of its economic transformation. The first half of Vision 2030 was defined by scale, speed, and ambition. The next phase will be defined by capital discipline, sequencing, and execution capacity. For investors and operators, this does not represent a cooling of opportunity, but rather a narrowing of the field toward projects and partners that align tightly with state priorities and financial reality.

The kingdom remains the Middle East’s largest economy, with GDP of approximately US$1.1 trillion and a population exceeding 32 million. Following a rebound in 2025 driven by the easing of oil production constraints, real GDP growth exceeded 4%. Over the 2026–2030 period, growth is expected to moderate to an average of around 3–3.3% annually. This slower pace reflects both softer oil prices and the growing weight of non-oil sectors, which now account for just over half of gross value added.

Growth is increasingly driven by fixed investment rather than consumption, underscoring the importance of capital availability, financing structures, and project execution.

Political Structure and Policy Execution

Saudi Arabia’s political environment remains exceptionally stable. Power is firmly concentrated under the current leadership, and continuity over the coming decades is widely expected. This has enabled decisive action and rapid implementation of social reforms, including the expansion of entertainment, tourism, and lifestyle offerings.

However, centralization also introduces a distinct execution profile. Policy announcements are often made with limited advance consultation, cabinet deliberations are opaque, and regulatory changes can be implemented before administrative systems are fully prepared. For businesses, this translates into low political risk but episodic policy risk. Commercial success increasingly depends on adaptability, relationship depth, and alignment with evolving priorities rather than reliance on static regulatory frameworks.

Fiscal Position and Capital Allocation

Saudi Arabia’s fiscal position has tightened materially. Oil continues to generate roughly 60% of government revenue and close to 70% of export earnings, leaving public finances exposed to price volatility. After recording a surplus in 2022, the budget returned to deficit, reaching an estimated 5.3% of GDP in 2025.

The 2026 budget targets a narrower deficit of around 3.3% of GDP, but under more conservative oil price assumptions the shortfall is likely to remain closer to 4–4.5%. Public debt, while still manageable by international standards, is rising rapidly, increasing from about 26% of GDP in 2024 to a projected low-40s percentage by 2030.

These pressures have driven a recalibration of Vision 2030. The Public Investment Fund, with assets approaching US$900bn, has instructed portfolio companies to cut annual spending by approximately 20%. Capital expenditure in the 2026 budget is roughly 14% lower than earlier projections. Major initiatives have not been abandoned, but timelines have been extended and scopes adjusted. Capital is no longer assumed; it is actively allocated.

Energy Strategy: Stability, Substitution, and Scale

Oil remains the backbone of the Saudi economy, but its role is evolving. The government has capped long-term sustainable oil capacity at around 12 million barrels per day, signalling a shift away from aggressive volume expansion. Average production is still expected to rise modestly, with output in 2026 projected to be around 7% higher year on year, but future gains will be incremental.

Natural gas represents the more strategic growth vector. Saudi Arabia is investing approximately US$100bn in the Jafurah unconventional gas field, which is expected to increase total gas production by around 80% by 2030 relative to 2021 levels. Gas will play a central role in domestic power generation, freeing additional crude for export, while also supporting petrochemicals and industrial expansion.

Renewables form the third pillar of the energy transition. The kingdom has set a target of installing 130 GW of renewable capacity by 2030, primarily solar and wind. Power-purchase agreements covering roughly 38 GW have already been signed, although installed capacity remains below 10 GW as of 2025. Financing constraints and the dominant role of state-linked entities mean that execution risk, rather than ambition, will determine outcomes.

Monetary Policy and Currency Stability

Macroeconomic stability remains a core strength. The riyal’s peg to the US dollar at 3.75 SAR/USD, in place since 1986, is supported by substantial foreign-exchange reserves and sovereign assets. Reserve cover is expected to average around 13 months of imports, giving authorities significant capacity to defend the peg even during periods of external stress.

Interest rates track US monetary policy. As the Federal Reserve eases, Saudi policy rates are expected to decline toward 3.75% by the end of 2026, reducing real interest rates to roughly 1.5%. This environment supports investment but also tightens domestic liquidity as borrowing by the government and state-linked entities increases.

Industrial Policy and Strategic Sectors

Industrialization sits at the centre of the diversification agenda. Under the National Industrial Strategy, Saudi Arabia aims to expand the number of factories to around 36,000 by 2035, roughly three times the current level. Priority sectors include petrochemicals, advanced materials, defense-related manufacturing, electric vehicles, and AI-linked infrastructure.

Electric vehicles illustrate both ambition and constraint. The government is targeting production capacity of around 500,000 EVs per year by 2030, anchored by projects involving Lucid, Ceer (a PIF-Foxconn venture), and a Hyundai joint venture. While these initiatives benefit from strong state backing and incentives, production costs remain higher than in established hubs such as North Africa or Turkey, raising questions about long-term export competitiveness.

Artificial intelligence and data infrastructure represent another strategic priority. A national AI program with a headline value of approximately US$100bn underpins investment in data centers, compute capacity, and nationwide AI education beginning in the 2025/26 academic year. Cheap energy provides a structural advantage, but shortages of high-skilled labour remain the principal constraint on scaling.

Services, Tourism, and Event-Driven Investment

Services account for nearly half of GDP and are expected to grow steadily. Tourism is being broadened beyond pilgrimage, with secular tourism, entertainment, and business travel playing an increasing role. Major international events, including Expo 2030 and the 2034 FIFA World Cup, are driving infrastructure investment across transport, hospitality, and urban development.

These events also introduce cyclical risk. Construction activity is expected to intensify toward the end of the decade, raising the likelihood of cost inflation and capacity bottlenecks, followed by a potential post-event slowdown. Managing this cycle will be critical to maintaining momentum beyond 2034.

Labour Market and Human Capital Constraints

Demographics provide both opportunity and challenge. Population growth of around 2.4% per year, a youthful age profile, and rising female labour participation — increasing from roughly 21% in 2017 to about 35% in 2024 — support long-term growth.

At the same time, skills mismatches are severe. Graduate unemployment remains high at around one-quarter, and shortages of technical and vocational skills are constraining project execution. Saudisation requirements continue to expand across hundreds of professions, increasing operating complexity for foreign firms while reinforcing the need for training, localization, and workforce development strategies.

External Exposure and Geopolitical Balance

Saudi Arabia remains open to trade and capital flows, but its external accounts are under pressure. The current account is expected to remain in deficit, averaging around 4% of GDP between 2026 and 2030, reflecting softer oil prices and strong import demand.

China now absorbs roughly 15% of Saudi exports, compared with less than 4% for the United States, increasing exposure to Chinese demand cycles. Direct exposure to US tariffs is limited due to exemptions for oil, but second-order effects from global trade fragmentation and slower global growth remain a risk.

Implications for Investors and Operators

Saudi Arabia is no longer defined by unconstrained ambition. It is increasingly defined by prioritization, sequencing, and execution capacity. For operators, success depends on aligning with state-anchored demand and building flexibility into timelines and capital structures. For investors, the dominant risks are delays, cost overruns, and capital rationing rather than political instability. For founders and partners, local presence, talent strategy, and credible long-term commitment matter more than speed.

The opportunity remains substantial — but it now rewards discipline, patience, and alignment as much as vision.