Saudi’s economic transformation collides with war and falling FDI 

Welcome to this week’s Fortune Gulf Brief. We’ll be covering:  

• Saudi Arabia’s FDI drops 18% amid war-driven retreat 
• Is the secondary market the Gulf’s next big opportunity? 
• Gulf’s sovereign giants step up global dealmaking 
• UAE funds may anchor OpenAI’s $30 billion fundraise 
• And, the three we enjoyed reading this week 

Foreign direct investment into Saudi Arabia fell 18% in the second quarter to SAR 22.3 billion ($5.95 billion), compared with the first quarter, highlighting the growing impact of the U.S.-Iran war on international investor appetite. 

The sharp pullback comes at a difficult time for the kingdom’s growth ambitions.  

Riyadh is targeting $100 billion in annual FDI by 2030 to help finance and accelerate the economic transformation envisaged under Vision 2030.

In doing so, it hopes to reduce the fiscal burden on the government and its sovereign wealth fund, the PIF, while also increasing the size of the private sector and bringing jobs and expertise into the country.  

However, Saudi bank lending to state-owned companies increased 18.4% year-on-year in August—three times the 6% pace of private-sector credit growth.  

Amid a growing strain on its public finances, the Finance Ministry last week raised its estimated 2026 budget deficit to SAR245 billion (4.9% of GDP) from SAR165 billion (3.3%) in the original budget issued at the end of last year. This is due to spending exceeding the original budget rather than a reduction in aggregate revenue.

In a report published on Tuesday, Moody’s noted how the recalibration of Vision 2030, announced in February this year, to focus on projects with the strongest returns and capital efficiency, will help reduce pressure on public finances.  

While high-profile mega-projects such as Neom are being restructured, the government is now prioritizing directing capital towards sectors with strategic value such as logistics, manufacturing, utilities, digital infrastructure, and AI.  

“By resequencing projects and preserving financial buffers, the government can sustain its diversification push while maintaining fiscal prudence,” the ratings agency said.  

However, volatility in oil prices and export capacity remain key risks, with Moody’s forecasting that Saudi real GDP will contract 3.3% this year, given the ongoing disruption of oil trade flows. 

Speaking at an energy forum in London on Monday, Saudi Aramco’s CEO Amin Nasser said the U.S.-Iran war had reduced oil supply from the region by nearly 3 billion barrels and that the world’s oil stockpiles are now “scarily thin”.  

Recent days have seen a major escalation in Yemen’s civil war, with Saudi-backed forces launching attacks to reverse recent Houthi territorial gains.  

On Tuesday, Yemen’s internationally recognized government said its forces had retaken several strategic positions along the western coast, including Mocha, Dhubab, and areas around the Bab el-Mandeb Strait. 

The Saudi-led coalition supporting the government has reportedly deployed 100 fighter jets conducting round-the-clock flights to help secure the strait. 

Meanwhile, the Houthis are reportedly retaliating by stepping up missile and drone attacks against Saudi targets including airports, military facilities, and an Aramco oil refinery.  

On Monday, Turkey, Pakistan, and Saudi Arabia agreed to rapidly deploy forces to Saudi Arabia in response to the Houthi attacks. The decision was made at an emergency meeting in Riyadh and marks the first use of their Mecca Alliance for Defence since it was signed on 7 August.  

Melissa Hancock

And as ever, thanks for reading, and do keep in touch with your thoughts and ideas.
melissa.hancock@fortune.com 

This story was originally featured on Fortune.com