War is impacting Saudi Arabia's finances; the country is seeking at least $8 billion in loans.

Saudi Arabia is seeking new loans to cope with the economic impact of the Middle East conflict.

On August 31, according to Bloomberg, Saudi Arabia's National Debt Management Center (NDMC) has begun discussions with several banks regarding a potential loan financing. The report, citing sources familiar with the matter, states the financing amount is at least $8 billion. Meanwhile, Saudi Aramco, the country's oil giant, is also in similar talks with banks.

Both potential deals are currently in their early stages, and their final outcome remains uncertain. If the financing is ultimately finalized, it would signify that Saudi Arabia, under pressure from war, is seeking to diversify its financing channels beyond the traditional bond market.

The impact of the war is becoming apparent, with the Saudi economy plunging into a deep contraction.

The Middle East conflict is having a significant impact on the Saudi economy. Tehran's attacks on Saudi energy infrastructure and the Houthi rebels' continued threats to Red Sea shipping are hindering Saudi Arabia's plans to bypass the Strait of Hormuz and export oil from its west coast.

Economic data also confirms this pressure. Saudi Arabia's economy experienced its worst contraction since the pandemic in the second quarter, with oil output plummeting by nearly 25% due to the attacks. Meanwhile, disruptions to trade in the Strait of Hormuz, rising import costs, and pressure on supply chains further dragged down overall economic performance.

Rising oil prices have provided some buffer for Saudi Arabia's finances. So far this year, the average price of benchmark Brent crude has been around $87 per barrel, alleviating some of the fiscal pressure. However, Saudi Arabia's fiscal deficit still reached 34.3 billion riyals (approximately $9.1 billion) in the second quarter.

Saudi Arabia has completed its annual financing plan but is still seeking new loans.

The background of this financing is quite unique. In May of this year, NDMC announced that it had completed its annual lending plan, meeting approximately 90% of its financing needs, and stated that any additional funding needs would be primarily met through private placement channels and the local market.

This recent attempt to explore financing intentions with banks is an extension of this financing strategy. So far this year, Saudi Arabia has raised approximately $6 billion through domestic and international bond markets, Aramco has raised an additional $4 billion, and the sovereign wealth fund, the Public Investment Fund (PIF), completed a $7 billion financing round in May, one of the first public market transactions since the outbreak of the Middle East conflict.

Late last year, the NDMC also completed a $13 billion syndicated loan with a seven-year term. This deal was considered a relatively rare financing arrangement at the time, demonstrating that Saudi Arabia was using non-public market channels such as bank loans to fund Crown Prince Mohammed bin Salman's economic diversification plans.

Saudi Arabia is increasing its use of external capital.

This financing move also aligns with Saudi Arabia's recent trend of adjusting its capital operations. According to Bloomberg, Saudi Aramco is pushing forward with a privatization plan that could ultimately raise as much as $35 billion. At the same time, Aramco plans to remain active in the debt market and launch new financial instruments to attract more investors.

Saudi Arabia's sovereign wealth fund, the Public Investment Fund (PIF), is also adjusting its investment strategy. As a key investment platform for Saudi Arabia's economic diversification, the PIF has historically undertaken numerous large-scale project investments. Under its new five-year strategy, the PIF plans to sell or list more mature assets to recoup funds for new projects, while also introducing private capital participation.

Despite the ongoing economic disruption caused by the war, Saudi Arabia continues to pursue overseas investments in sectors such as gaming and electric vehicles. Recently, Saudi Arabia also pledged to invest €6 billion in a theme park complex near Paris.

Amid rising fiscal pressures and continued strong investment demand, Saudi Arabia is raising funds through loans, bonds, asset sales, and the introduction of private capital to alleviate its financial burden.

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