From Growth to "Aramco": Three Tests Reveal the Cost of Iran's War on Saudi Arabia's Economy

SadaNews - Followers of the Saudi economy are preparing for three consecutive tests that may reveal the damage that the Iran war has inflicted on growth, the budget, and the oil sector, while also confirming the Kingdom's ability to withstand and adapt to the worst crisis affecting the region in decades.

The official statistics authority of the Kingdom is set to publish GDP data for the second quarter on Thursday morning, before Saudi Aramco announces its financial results on August 4. Analysts also expect the publication of the state's general budget in the coming days.

This combined data will provide a nearly complete picture of the performance of the Arab world's largest economy during the first half of the year, while statements from Aramco officials will gain particular importance as markets await the company's assessment of the threats posed by the Iran-aligned Houthi group to Saudi oil exports through the Red Sea.

The Non-Oil Sector is Key

Economists expect that the Kingdom's oil GDP will contract due to a decline in production compared to the same period in 2025.

However, the focus, according to Jean-Michel Saliba, an economic analyst at Bank of America, will be on "assessing the impact of the conflict on the non-oil economy across its various sectors, as well as its resilience, adaptability, and the impact of government spending."

Alternative economic indicators suggest a degree of resilience, albeit accompanied by clear challenges. The Purchasing Managers' Index has risen for three consecutive months but remains lower than last year's levels, while central bank data showed an increase in the value of point-of-sale transactions during April and May.

In contrast, foreign trade data showed a significant decline in imports during the same period, potentially indicating a slowdown in domestic demand, a hypothesis supported by the slowdown in bank lending growth.

Tim Callen, the former head of the International Monetary Fund mission to Saudi Arabia, told "Asharq Bloomberg" that a contraction in the non-oil sector in the second quarter and a recovery in the following quarter "would not be surprising," but he added: "I believe it will depend on government spending in the second quarter."

Government Spending Determines the Growth Path

Callen, a visiting researcher at the Gulf States Institute in Washington, expects budget data to show a decrease in spending compared to the previous three months, "but it will not yet be at its normal levels. Therefore, I expect a deficit lower than that recorded in the first quarter, but it will still indicate that the annual deficit will not achieve the target set in the 2026 budget."

The Kingdom's budget recorded the largest growth in capital spending in the first quarter in at least ten years, amid accelerating logistics spending with the onset of the war. Data also showed a leap in government support items and military spending, resulting in a rise in the budget deficit to its highest levels since 2018.

As for revenues, Saliba points out that he awaits whether the budget data will confirm that the rise in oil prices during the second quarter was sufficient to compensate for the decline in production and export rates.

“Aramco” Between the Second Quarter and Future Perspectives

The market is also waiting for the results of Saudi Aramco for more details on the state of the Saudi oil and petrochemical sector, where analyst forecasts gathered by Bloomberg indicate a growth in net profits by 18% to 123.6 billion riyals, and an 8% increase in revenues to 451 billion riyals.

A report from Barclays analysts dated July 21 indicates that Aramco’s production was clearly affected by disturbances during the quarter, predicting a decrease in total liquid production compared to the previous quarter and the same period last year.

The bank expects production to reach about 7 million barrels of oil equivalent per day, against an average of $97 per barrel for Brent during the quarter. It is also likely that the actual selling prices achieved by the company were higher than the benchmark prices, given the sharp imbalances witnessed in the actual markets and delivery terms, particularly during April and May.

Conversely, the bank believes that the decline in shipping activity and the continued docking of a large number of tankers in the Strait of Hormuz have contributed to tightening supplies, particularly in the refined products market, which may support profits from refining and chemical activities, compensating for the impact of reduced production volumes.

However, second-quarter results will not be the only focus of investors; attention will also turn to Aramco's forecasts for production and exports amid Houthi attacks on Saudi shipments in the Bab el-Mandeb Strait.

Both Callen and Saliba see a need to know the company's assessment of its ability to redirect shipments through alternative routes in the Red Sea, and the potential implications for production.

Callen added: "What is the volume of exports that can realistically be shipped at present if tankers are forced to pass through the Suez Canal? What does that mean for local production, and how will production cuts be managed?" This highlights the questions that remain pending, awaiting the company's comments.