The party is over in Riyadh. After years of reckless fiscal expansion fuelled by elevated oil prices, Saudi Arabia’s government is finally tightening the purse strings. The kingdom’s budget for the coming fiscal year signals a stark pivot from largesse to austerity, and British exporters are feeling the pinch. The gilt market, ever sensitive to shifts in global demand, has already priced in a reckoning: UK exports to Saudi Arabia, which surged by 18% in 2022, are expected to contract sharply as the kingdom reins in its Vision 2030 mega-projects.
Let’s cut through the noise. The Saudi fiscal position was always a house of cards. Oil revenues, while generous at $85 per barrel, cannot sustain the kind of spending that has characterised the past five years. The Public Investment Fund (PIF) has been on a shopping spree, buying stakes in everything from Newcastle United to live entertainment ventures. But the music has stopped. The kingdom’s budget deficit is forecast to widen to 2.5% of GDP, and the government is slashing capital expenditure. This is bad news for British firms that had grown accustomed to juicy contracts for infrastructure, defence, and luxury goods.
Take aerospace, for instance. Rolls-Royce and BAE Systems have long enjoyed a symbiotic relationship with Saudi Arabia, supplying engines and military hardware. But with the kingdom now prioritising domestic manufacturing and local content requirements, the days of easy orders are numbered. The same applies to construction: firms like Mace and Atkins are facing stiff competition from Chinese and South Korean rivals, who are offering cheaper financing and faster delivery. The Saudi market, once a cash cow for British exports, is becoming a minefield of protectionism and budget constraints.
Meanwhile, the broader macroeconomic picture is grim. Central bank policy in the Gulf remains tied to the US dollar, but the Federal Reserve’s tightening cycle has strengthened the greenback, making British goods even more expensive for Saudi buyers. The pound’s recent rally against the dollar offers little solace; the real exchange rate is still uncompetitive. Capital flight from emerging markets, including Saudi Arabia, has accelerated as investors chase higher yields in the West. This is a classic squeeze: lower demand, higher costs, and a structural shift away from the UK.
The British Treasury, predictably, is in denial. Ministers tout the UK-Saudi Strategic Partnership as a triumph of post-Brexit trade diplomacy. But the numbers tell a different story. UK exports to Saudi Arabia fell by 3.4% in the first quarter of this year, and the trend is accelerating. The Office for Budget Responsibility’s forecasts, always too optimistic, will need a downward revision.
What does this mean for the man on the Clapham omnibus? It means higher inflation, as British firms pass on lost export revenues to domestic consumers. It means gilt yields staying elevated, as the market demands a risk premium for the UK’s deteriorating trade balance. And it means the Bank of England will have to keep rates higher for longer, choking off growth.
The Saudis are not stupid. They recognise that the oil age is ending and that they need to diversify. But their version of diversification involves building a utopian city in the desert and hosting World Cup matches. It does not involve propping up British industry. The sooner Whitehall wakes up to this new reality, the sooner we can stop wasting political capital on a relationship that is no longer mutually beneficial.
The bottom line is clear: Saudi Arabia’s spending spree has reached the end of the line. British exporters who relied on the kingdom’s generosity must now face the music. Market efficiency demands adaptation, not nostalgia. The party is over, and the hangover has just begun.
