A projected 30 percent drop in Saudi Aramco’s oil dividends in 2025 is likely to force the government and state-owned Saudi Public Investment Fund to step up borrowing to fund infrastructure and other projects under the kingdom’s Vision 2030 economic and social strategy, analysts say.
The world’s largest oil company intends to cut dividends to shareholders by $38.8 billion in 2025 compared to last year. This would leave the Saudi government and Saudi PIF – which between them own 97.5 percent of Aramco – facing a drop in revenue larger than the GDP of Zimbabwe.
Saudi Arabia’s budget deficit is likely to increase as a result, analysts say, although the country should be able to maintain spending on infrastructure projects by tapping international debt markets.
The oil major announced the planned dividend cut following a 7 percent fall in production and net income, according to a report by Jadwa Investment.
“[Oil] prices have been quite volatile last year,” says Amena Bakr, head of Middle East energy and Opec+ insights at Kpler. “There was quite a bit of downward pressure on the price due to negative sentiment, uncertainty and so on, which also factored into the price.”
Saudi Aramco’s share price fell nearly 2 percent on Tuesday.
The Saudi government had already forecast a drop in oil revenue for this fiscal year which started on January 1, although Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB), says new projections “go beyond” what was expected.
“Clearly, we would expect to see a wider deficit in Saudi Arabia than estimated before,” she says. ADCB has increased its deficit forecast from 3 percent of GDP to more than 4 percent.
The blow to the Saudi budget comes at a time of massive spending in the country. Saudi Arabia has embarked on multiple billion-dollar projects to achieve its Vision 2030 goals to help diversify the economy. Aramco’s performance-linked dividend has been an important source of investment since it was established in 2022.
“It is not unlikely that Saudi Arabia will resort to the international debt market to finance its budget and make up for the shortfall,” says Samer Hasn, senior market analyst at XS.com.
The kingdom has consistently indicated its willingness to use its relatively low levels of debt to increase borrowing to diversify. The kingdom’s debt-to-GDP ratio is currently below 30 percent.
While an increase in borrowing risks putting more pressure on an already squeezed debt market, the fallout from Aramco’s dividend cuts is the latest reminder how dependent Saudi Arabia is on oil and of the need for diversification.
Saudi Arabia “will certainly not be satisfied with cutting spending on this transformation while Aramco’s dividends fall, as this will make the kingdom’s economy more vulnerable to negative factors in the oil market,” says Hasn.
In the short run, however, a widening deficit budget and increased debt obligations could increase the kingdom’s exposure to oil markets.
“Our biggest concern would be a sharp drop in the oil price,” says Malik, “because that would require a meaningful retrenchment in spending to limit the build-up in debt.”
On Monday, members of Opec+ agreed to start unwinding oil production cuts, a decision that should allow Saudi Arabia to export more and potentially increase oil revenues.
“They’re sitting on quite a bit of spare capacity that if they bring online could be very profitable for them,” says Bakr. “That’s not to say that they’re going to be doing that.”
However, she adds, if Opec+ continues to unwind cuts as planned, “this is going to ease some of the restraints on Aramco and help them produce more and shore up more revenues for this year”.
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