• GDP growth strengthens supported by non-oil manufacturing, telecoms, and trade
• Global trade uncertainty and regional insecurity pose risks to disinflation path
• MPC expects that GDP growth will reach full potential by mid-2026, inflation will reach target band by end-2026

The MPC decided to cut the overnight deposit rate, the overnight lending rate, and the rate of the main operation by 100bps to 20.0%, 21.0%, and 20.5%, respectively. The Committee also lowered the discount rate by 100bps to 21.5%. Analysts were split on the outcome of the meeting (we pencilled in a 100bps rate cut), because inflation has moderated due to slower than usual food inflation, but global geopolitical tensions continue to pose risks. We note that the pound has gained some strength on the back of portfolio inflows, strong remittances and robust tourism inflows, and the real interest rates remain fairly elevated, which gave some space for a relatively conservative 100bps cut.

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In the accompanying statement, the MPC said that the rate cut was consistent with maintaining a monetary stance that anchors inflation expectations and sustains the disinflation path. The MPC expects that headline inflation will remain broadly stable during Q4 before declining steadily toward the CBE target of 5% - 9% by end-2026. However, the disinflationary path remains constrained by relatively persistent non-food inflation, the impact of fiscal measures, and global trade uncertainty.

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On the domestic front, the MPC said it expects a marginal decline in GDP growth inQ4, after quickened to 5.3% y/y in Q3 from 5.0% y/y in the preceding quarter. GDP growth is supported by non-oil manufacturing, tourism, trade, and telecommunications, while on the expenditure side - there have been notable improvements in household consumption and private investments. Despite this sustained GDP growth, the current output trajectory will continue to support the forecasted disinflation path in the short term, with demand-side inflationary pressures expected to remain contained under the current monetary stance, the MPC said. The estimated output gap is gradually narrowing, albeit still marginally negative, with economic activity expected to reach full potential by June 2026, according to the central bank.

• Oil exports keep rising, reflecting higher export volumes
• Saudi Arabia has been unwinding oil production caps more aggressively
• Most important non-oil exports are machines and electrical equipment, plastics and rubber, and chemicals
• Machinery and equipment tops imports list, followed by transport equipment
• China remains Saudi Arabia's main trading partner

The trade remained relatively strong in October, rising by 47.4% y/y to SAR 23.9bn (USD 6.4bn), following a 56.3% y/y jump in the preceding month, according to preliminary data published by GASTAT. This is still one of the strongest surpluses in seventeen months and reflects a robust increase in national exports, which was partly offset by rising imports (+11.8% y/y vs +4.3% y/y). The trade surplus had contracted considerably over the past three years because of a slump in oil revenues due to lower oil prices and production cuts, amidst a rising import bill. However, Saudi Arabia has begun lifting the oil production caps more aggressively since May, as part of an OPEC+ agreement, while oil prices recovered since June on the back of regional insecurity. Imports, meanwhile, have been rising robustly on the back of strong non-oil economic growth and strong consumption and investments.

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Breakdown

Saudi Arabia remains highly dependable on oil exports, which account for about 70% of total export revenue. The kingdom's significant external buffers provide some protection against oil price swings, but the current global trade environment remains unpredictable and volatile. On a positive note, the non-oil exports have been rising gradually and the most important non-oil export goods during the month were machinery, electrical equipment and parts (24% of non-oil exports), and chemicals (19% share). The government has been investing in new industries such as electric vehicles and drug manufacturing as part of an ambitious program to diversify the economy away from oil. The government also wants to boost tourism and mineral exploration, and the program has started to yield some positive results, despite weaker than expected FDI inflows. Exports to China accounted for about 14% of Saudi exports in the month, followed by the UAE, India, and South Korea. Exports to the US are relatively small and the direct impact of the US tariffs is expected to be negligible.

Total imports rose by 4.3% y/y in the month, which is significantly lower than the usual y/y rate because of a high base effect. Imports have been rising steadily since 2020 due to Saudi Arabia's robust non-oil economic growth fuelled by consumption, investments, and spending on massive infrastructure projects. The most important imported merchandise goods were machinery and electrical equipment (around 30% of total merchandise imports), followed by transport equipment and parts (around 12% share). In terms of utilization, imports for intermediate consumption accounted for about 42% of total imports, followed by imports for final consumption (32%) and capital goods (26%). While skewed towards consumption, the nature of imports has gradually transitioned towards capital goods as part of the economic transformation program of the government. Imports from China accounted for about 25% of total imports, followed by the US (9%), and the UAE (6%). The ratio of non-oil exports (including re-exports) to imports strengthened to 42.3% from 33.4% a year earlier, because of a strong increase in non-oil exports on the year.

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Outlook for Q4 2025

The 2024 merchandise trade surplus came in at weak SAR 273bn or 6.6% of GDP, falling sharply from 10% of GDP in 2023, but the global and regional environment has deteriorated sharply since then, which dragged on the oil market. Oil prices recovered from the lows recorded in April and May, while higher oil production and export volumes should provide support to the trade balance during Q4. On the other hand, the import bill is set to increase even further, as the kingdom keeps spending on the giga-projects under its ambitious Vision 2030 economic program. The 12-month rolling surplus came in at SAR 209bn in the month, and we think the 2025 trade surplus will fall by about 10-12% on the year.