Saudi Arabia's economy shrinks by 4.8% amid Iran war: What to know
The kingdom saw a 24.7% year-on-year decline in its oil sector for the April 1 to June 30 period due to the closure of the Strait of Hormuz.
Saudi Arabia’s economy contracted by 4.8% in the second quarter due to the five-month war in Iran and the near-total closure of the Strait of Hormuz. It was the kingdom's biggest yearly economic contraction since the height of the COVID-19 pandemic in 2020.
The Gulf’s largest economy saw a 24.7% year-on-year decline in its oil sector for the April 1 to June 30 period, according to a report published Wednesday by the Saudi General Authority for Statistics. The fall drove the kingdom’s economic contraction, as hydrocarbons account for around 55% of Saudi government revenue.
The steep decline in oil activity outweighed modest growth in the non-oil and government sectors. Non-oil activities grew 0.6% and government activities increased 0.9%, the data showed.
The oil sector cut 5.4 percentage points from annual GDP growth and the non-oil sector added 0.4 percentage points, while government activities and net taxes on products each contributed 0.1 percentage points.
Why it matters: The contraction shows that the Iran war is taking its toll on the Arab world’s largest economy and stands in stark contrast to the 3% growth Saudi Arabia recorded in the first quarter.
On Tuesday, the International Monetary Fund said the kingdom was remaining economically resilient amid the conflict, mainly due to the country’s long-term planning and strategic infrastructure investments that are helping mitigate the impact of regional tensions.
In a report, the fund stated that Saudi Arabia has sufficient fiscal space to support the economy if the conflict persists, citing low government debt, substantial financial reserves, significant sovereign assets and the role of its sovereign wealth fund, the PIF.
However, Saudi Arabia, the region’s largest oil exporter, has had to reroute more than 70% of its crude oil exports to its Red Sea port of Yanbu following the onset of the US-Israel-Iran war on Feb. 28. Iran responded to US and Israeli strikes by attacking Gulf neighbors and attacking ships in the Strait of Hormuz, a crucial waterway on Saudi Arabia’s east coast that in peacetime saw around a fifth of all oil and liquefied natural gas shipments pass through it.
Export data shows that using Yanbu to bypass the Strait of Hormuz has still not allowed Saudi Arabia to export as much oil as before the war. Even before the Houthi attacks, Saudi Arabia’s crude exports had plunged from 7.28 million barrels per day in February to 3.43 million bpd in May, according to data compiled by major organizations including the International Energy Agency and OPEC.
Furthermore, the safety of the alternative export route appears to have been relatively short-lived. On July 20, the Iran-backed Houthi rebels in Yemen imposed a blockade on Saudi oil tankers in the Bab el-Mandeb Strait, the southern gateway to the Red Sea. On July 23, the Houthis claimed attacks on two Saudi tankers, forcing Riyadh to look at alternative export routes to the Red Sea coast and Strait of Hormuz.
Although reports indicate that Saudi Arabia is pumping additional crude exports from an Egyptian port to bypass the other two main routes, the volumes are nowhere near what can be transported via the Strait of Hormuz or via the Red Sea.
Know more: On the diplomatic side, Saudi Defense Minister Prince Khalid bin Salman met with US President Donald Trump and Vice President JD Vance on Wednesday, Axios reported. Together, the two countries conducted airstrikes on a pro-Iranian militia in Iraq on Tuesday. In a statement, US Central Command said the strikes were in response to more than 30 drone attacks directed by Iran’s Islamic Revolutionary Guard Corps carried out by Iraqi militias against Saudi Arabia earlier in the week.
A source familiar with the matter told Axios that the purpose of the meetings was to deliver a message from the crown prince about the war with Iran.
