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Fitch warns that Saudi Arabia faces increasing fiscal risks due to rising spending and a drop in oil prices.

Fitch Ratings warned on Friday that Saudi Arabia's fiscal consolidation path is fraught with risk, due to lower oil prices, heavy spending commitments linked to Vision 2030, the country's economic transformation plan, and the Kingdom's financial situation.

Vision 2030, led by a Public Investment Fund of nearly $1 trillion, aims to reduce reliance on crude oil, and develop sustainable revenue streams. This requires hundreds of millions of dollars of investment.

Fitch Ratings' warning that Saudi's ambitious spending plans face risks follows the Saudi government's 2026 pre-budget statement on Tuesday, which signalled a shift toward tighter fiscal discipline after a sharper-than-expected widening of the 2025 deficit.

Saudi Arabia, the top oil exporter in the world, forecasts that its fiscal deficit will be 5.3% of the gross domestic product by 2025. This is nearly twice the initial projection of 2.3%, and then it will shrink to 3.3% by 2026. This compares to an earlier estimate for 2025 of 2.9%.

Fitch said that the decline in revenue for 2025 is primarily due to lower oil revenues. Fitch noted that non-oil revenue was likely to remain robust due to a strong economy outside of oil and conservative budgeting.

Flagship projects include NEOM - a futuristic, massive urban and industrial development near the Red Sea that is almost the size of Belgium.

Saudi Arabia's government projects that its revenues will increase by 5.1% by 2026, while its expenditures will drop 1.7% from 2025. Fitch anticipates fiscal tightening due to stable oil revenue, increased non-oil income, and modest reductions in current and capital expenses.

Reports in April stated that the falling oil price was increasing pressure on Saudi Arabia, forcing it to either reduce spending or increase debt in order to finance its ambitious agenda. Fitch said that the fiscal strain highlighted the Kingdom's vulnerability to oil price swings even as it intensifies efforts to create alternative revenue streams. Reporting by Jana Choukeir and Tala Ramadan; Editing by Susan Fenton

(source: Reuters)