Bond Update: Saudi Arabia Sovereign USD Bonds — Taking a Detour, Resilience Intact

Since the US–Iran conflict erupted in late February, the blockade of the Strait of Hormuz has become the single most significant supply risk hanging over the global crude oil market, with oil exports from the Middle East’s major producers falling markedly from pre-conflict levels. As the world’s largest oil exporter — and a country whose fiscal revenue is heavily dependent on oil — Saudi Arabia has naturally become a focal point for the market. That concern is already visible in bond prices: the yield on the Saudi government’s USD bond maturing in 2046 has risen a cumulative 66 basis points since the conflict began (see Chart 1).

Chart 1: Yield movement of the 2046 Saudi government bond

For bond investors, the key question that determines the appeal of Saudi government bonds is whether the conflict has materially undermined Saudi Arabia’s ability to service its debt. This article works through the issue across four dimensions: the structure of expenditure, the transmission mechanism of oil prices, the revenue momentum behind Vision 2030, and the structure of the country’s reserves and debt.

A larger-than-expected spending bill produced the biggest quarterly deficit on record

Saudi Arabia’s first-half fiscal deficit widened to SAR 160.0 billion (all figures in Saudi riyals unless stated otherwise) — already equivalent to 97% of the full-year budgeted deficit of SAR 165.4 billion. The 1Q deficit of SAR 125.7 billion was the largest single-quarter deficit on record, while the 2Q narrowed to SAR 34.3 billion. First-half oil revenue rose 9% YoY to SAR 329.8 billion, and total revenue increased 6% to SAR 599.8 billion, with the growth driven mainly by a 22% YoY surge in 2Q oil revenue (against a 3% decline in the 1Q).

Total expenditure rose 15% YoY to SAR 759.8 billion. Within that, general items (covering subsidies and contingency allocations) jumped 44% to SAR 128.8 billion, and military and security spending rose a combined 11% to SAR 191.4 billion; together these two lines accounted for close to 60% of the total increase in spending (see Chart 2). The rise in expenditure was led by war-related factors, but the non-war drivers should not be overlooked. Spending by the economic-resources segment rose 24% YoY to SAR 56.5 billion — in line with the 2026 budget’s deliberate tilt towards industry and logistics, and unrelated to the conflict. Capital expenditure was also front-loaded, with 55% of the full-year capital budget already executed in the first half, well above the sub-40% run-rate in the same period last year. On top of that, in 2025 — a year with no conflict — the deficit still overshot budget by 174%, showing that the tendency to overspend predated the conflict; the war merely amplified the size of the deficit.

Chart 2: Saudi government expenditure

Higher oil prices supported second-quarter revenue growth: Q2 revenue increased by 22%

The blockade of the Strait of Hormuz did indeed constrain oil exports from the Middle East, which fell noticeably from pre-conflict levels (see chart 3). Saudi Arabia’s geographic advantage, however, is that it has outlets on both the Persian Gulf and the Red Sea. The East–West pipeline that links the two runs from the Abqaiq field in the east across to the Red Sea port of Yanbu, bypassing the Strait of Hormuz entirely and allowing Saudi Arabia to keep exporting oil, albeit at a limited level.

Chart 3: Change in oil exports across Middle Eastern countrie

Furthermore, the supply disruption briefly pushed Brent crude above USD 110 per barrel in April, and it has held above USD 80 for most of the past few months. That price gain was enough to offset the revenue impact of lower volumes. Saudi Aramco’s second 2026 results (the company is 97%-owned by the Saudi government) illustrate the point precisely: even though production fell 28% QoQ to 7.57 million barrels per day, the average realised crude price rose from USD 77 per barrel in the prior quarter to USD 108, lifting total revenue 12% QoQ to USD 139.1 billion.

Aramco’s performance feeds through to Saudi government revenue via three channels: royalties, Aramco’s income tax, and dividends. Royalties are levied on a progressive scale — the higher the oil price, the larger the government’s take. Against a backdrop of solid Aramco earnings and sharply higher oil prices, 2Q government oil revenue therefore rose 22% YoY to SAR 185.1 billion. That said, Saudi oil exports had not yet returned to pre-conflict levels in the 3Q, and with Brent prices having pulled back somewhat, 3Q oil revenue may not match the strength of the 2Q — though it should still hold at a healthy level.

Elevated deficits need not persist into the medium term

Looking back at the first half of 2026, the deficit stemmed mainly from spending growth, and the Saudi government has room to narrow it by reining in expenditure. The reason is that the increase was concentrated in discretionary or event-driven items rather than a breach of recurring obligations; the government has discretion over this spending, making it relatively easy to trim. Capital expenditure is typically back-loaded, yet 55% of the full-year budget was already executed in the first half, which implies the remaining quarters are likely to run below the current pace. Military and subsidy spending are event-driven and should gradually fade if the ceasefire holds. Official guidance also points to contraction rather than expansion: the 2026 budget sets full-year spending at SAR 1,312.8 billion, 5.4% below the 2025 actual of SAR 1,388.4 billion, and the medium-term fiscal framework shows spending rising only modestly to around SAR 1,419.0 billion by 2028. The large first-half deficit may therefore prove temporary and need not carry into the medium term.

Vision 2030 will be the real engine of budget balance

Even so, in 2025 — with no conflict — actual spending already exceeded budget by 8%; annualising first-half spending of SAR 759.8 billion implies full-year spending of SAR 1,519.5 billion, 16% above this year’s budget. Over the long run, the scope to cut spending is limited, and revenue growth is the true engine of budget balance — which is precisely where Vision 2030 comes in.

Indeed, under Vision 2030 policies, non-oil revenue grew from SAR 185.7 billion in 2016 to SAR 505.0 billion in 2025, rising a further 2% YoY to SAR 269.9 billion in the first half, so the share of non-oil revenue has expanded accordingly (see chart 4). The momentum comes chiefly from tourism- and entertainment-related industries: tourism spending reached SAR 300.0 billion in 2025, lifting its share of GDP from 3% to 5%, against a 2030 target of 10%.

Chart 4: Share of Saudi non-oil revenue

Three Core Revenue Growth Drivers for the Next Three Years

Over the coming years, the momentum behind revenue diversification comes mainly from three sources.

1.      Mining: Saudi Arabia’s mineral resources are valued at USD 2.5 trillion, and the authorities have set a target of lifting the sector’s contribution to GDP from SAR 68.0 billion to SAR 240.0 billion by 2030, converting it into government revenue through royalties and licence fees.

2.      Religious tourism: Umrah pilgrim numbers rose from 6.2 million in 2016 to 16.92 million in 2024, with a 2030 target of 30 million — high-frequency spending that directly broadens the VAT base.

3.      Mega-events: the 2030 Riyadh World Expo and the 2034 FIFA World Cup together represent a project scale of more than USD 100 billion, driving infrastructure and consumption cycles.

Ample financial strength provides an effective cushion against oil-price volatility

As of end-June 2026, the Saudi central bank’s official reserve assets stood at roughly SAR 1.85 trillion, up 8% YoY, and the government’s reserve account at the central bank held a further SAR 399.1 billion. The former is equivalent to 1.1x the SAR 1,685.0 billion of public debt, while the latter is equivalent to 2.4x the full-year budgeted deficit of SAR 165.4 billion. The Public Investment Fund (PIF) manages assets exceeding SAR 3.5 trillion, but these are concentrated in large domestic projects and unlisted equity with limited liquidity and are better viewed as long-term support (see Chart 5). Overall, Saudi Arabia’s fiscal buffers remain ample, and it is under no pressure to tighten fiscally on account of short-term swings in oil prices.

Chart 5: Saudi reserve assets and debt

The scale and structure of the debt provide further protection. Of the public debt outstanding at end-June, domestic debt accounted for 62.9% (SAR 1,060.1 billion) and external debt for 37.1% (SAR 624.9 billion); the central bank’s FX reserves alone are enough to cover all external debt roughly three times over. For USD bond investors, Saudi Arabia’s foreign-currency debt obligations are modest relative to its FX assets, and the riyal’s peg to the US dollar keeps exchange-rate risk contained. When Fitch affirmed Saudi Arabia’s “A+” rating on 11 July, it explicitly noted that both the government debt ratio and the sovereign net foreign-asset position are significantly better than the medians for  A and AA rated sovereigns.

Saudi Arabia’s government-debt-to-GDP ratio stood at 31.8% at end-2025, and even on Fitch’s projection that it rises to 41.3% by end-2028, it remains far below the 58.1% median projected for peers over the same period. Although the concentration of oil revenue caps Saudi Arabia’s sovereign rating at A+, its overall debt level is relatively low, which means the country still has ample room to keep financing at a reasonable cost and to fund Vision 2030 projects.

Are Saudi Arabian sovereign bonds worth investing in?

Taken together, Saudi Arabia’s export route that bypasses the Strait of Hormuz, the offset that higher oil prices provide against lower volumes, and its solid reserves and low debt levels all give its debt-servicing ability a healthy safeguard. Although the first-half deficit has already reached 97% of the full-year budget, the increase is concentrated in front-loaded capital expenditure and event-driven items such as military and subsidy spending, with recurring obligations left intact; as the ceasefire holds, deficit pressure is expected to ease over the remaining quarters. There are currently three USD bonds issued by the Saudi government available on the platform, all carrying issue credit ratings of A+ / A+ (S&P / Fitch) and all investment grade (see Table 1). Relative to sovereign issuers of the same rating, the yield to maturity on the Saudi bonds is reasonably attractive. These bonds suit investors who are seeking stable cash flow and are willing to tolerate a degree of geopolitical volatility.

Table 1: Saudi USD sovereign bonds

Bond name	Tenor (yrs)	Investor purchase price	Net yield to maturity	Bond Credit rating (S&P/Fitch)
KSA 4.500% 26Oct2046 Govt (USD) （Tadable on BondsupermartLive）	20.2	79.64	6.30% （YTM）	A+／A+
KSA 5.250% 16Jan2050 Govt (USD)	23.4	87.37	6.29%	A+／A+
KSA 5.750% 16Jan2054 Govt (USD)	27.4	92.45	6.33%	A+／A+
Source：FSM Global Data as of 24 August 2026