SKN | Morgan Stanley Cuts Saudi Arabia Growth Forecast as Prolonged Oil Disruption Delays Recovery

Key Takeaways:

• Morgan Stanley has lowered its 2026 Saudi Arabia GDP forecast to a contraction of 1.8%, citing a longer-than-expected disruption to oil exports.
• The bank now expects oil export volumes to normalize in Q2 2027, later than previously anticipated.
• Morgan Stanley forecasts Saudi oil GDP to contract 17.8% in 2026, while non-oil activity is expected to grow 3%, providing partial economic support.
• The bank expects a sharp rebound in oil GDP in 2027 as production and export capacity recover, with fiscal buffers remaining supported by higher oil prices.

Morgan Stanley has revised its outlook for Saudi Arabia, lowering its 2026 GDP forecast to a contraction of 1.8% as a prolonged disruption to oil exports weighs more heavily on the economy than previously expected. The bank’s revised view pushes the anticipated normalization of oil export volumes into the second quarter of 2027, extending the period of pressure on headline growth.

Morgan Stanley Extends the Timeline for Oil Recovery

The investment bank said Saudi oil export volumes in the third quarter remained below expectations, deepening the drag from the energy sector. Morgan Stanley now expects crude production to average approximately 6.3 million barrels per day in the fourth quarter, resulting in an estimated 28% year-over-year contraction in oil activity during the period.

For the full year, the bank expects oil GDP to contract 17.8%. Its base case assumes crude exports remain between 4 million and 5 million barrels per day in the fourth quarter, reflecting constrained flows through Hormuz alongside available export capacity through the Yanbu pipeline.

Non-Oil Activity Provides a Partial Buffer

Morgan Stanley’s forecast is not based on a broad deterioration across the Saudi economy. The bank expects non-oil activities to grow 3% in 2026, supported by continued domestic activity even as private-sector momentum moderates.

Second-quarter government consumption increased 3.2% year over year, while private consumption growth slowed to 1.1% from 4.1% in the first quarter. Gross fixed capital formation increased only 1.3%. The Saudi PMI remained in expansion territory at 53.8 in August, while September point-of-sale transaction values increased 5.1% year over year.

Morgan Stanley Sees a Stronger 2027 Rebound

The bank’s revised forecast points to a significant reversal once production and export capacity normalize. Morgan Stanley expects oil GDP to expand approximately 23% in 2027, reflecting the recovery in energy output from the unusually weak 2026 base.

The bank also expects fiscal conditions to remain comparatively resilient. It forecasts oil fiscal revenue of approximately 685 billion Saudi riyals in 2026, rising to 740 billion riyals in 2027 as export volumes recover. Morgan Stanley assumes oil prices will average above $75 per barrel during the first half of 2027, helping offset weaker production volumes.

Why Morgan Stanley’s Revision Matters

For Morgan Stanley, the key issue is the timing of normalization. The bank is not forecasting a structural collapse in Saudi activity, but rather a longer period in which constrained oil exports suppress headline growth before a potentially strong 2027 recovery.

For investors assessing Saudi exposure, the distinction between oil and non-oil growth remains critical. Morgan Stanley’s outlook suggests that fiscal resilience and domestic activity can provide a buffer in the near term, while the eventual normalization of energy exports remains the principal catalyst for a broader economic rebound.

For a confidential discussion regarding your cross-border banking structure, contact our senior advisory team.