Saudi Arabia’s economic trajectory is facing a complex set of challenges amid ongoing regional conflicts and shifting domestic priorities. The kingdom’s intervention in Yemen, which began in 2015 under the leadership of then-Defense Minister Mohammed bin Salman—now crown prince and prime minister—marked a significant moment in its regional policy. Initially perceived as a bold and sometimes impulsive leader, Mohammed bin Salman’s international reputation suffered greatly following the 2018 murder of Saudi dissident Jamal Khashoggi. Since then, he has redirected his focus inward, initiating broad social and economic reforms aimed at transforming Saudi Arabia from a conservative oil-dependent state into a diversified hub for finance and tourism.
The Yemen conflict reached a turning point with a truce in 2022, reflecting a strategic shift in Saudi Arabia’s approach. Concurrently, the country embarked on ambitious development plans, including the so-called giga projects like The Line, a futuristic linear city within the Neom economic zone. These initiatives were designed to attract investment and foster new sectors, signaling an openness to business that had not been seen before in the kingdom. However, some observers note that foreign visitors to events such as the Future Investment Initiative (FII) often come seeking Saudi funds rather than offering direct investment.
Economic pressures have mounted prior to the recent escalation of war-related tensions with Iran and the Houthis. Rising oil prices combined with significant government spending have strained public finances. As a result, the Public Investment Fund (PIF), Saudi Arabia’s sovereign wealth fund, has shifted resources toward domestic projects expected to yield financial returns. The International Monetary Fund projects a 3.3 percent contraction of the Saudi economy this year, with protracted regional conflicts likely influencing future budget allocations.
Experts highlight an increased emphasis on security spending. Karen Young, a senior research scholar at Columbia’s Center on Global Energy Policy, notes that defense expenditure is set to rise, while the PIF will concentrate further on domestic sectors, reducing investments in some areas. This realignment poses particular risks for the tourism industry, which had previously demonstrated resilience through religious pilgrimages and regional travel within the Gulf Cooperation Council (GCC). The ongoing conflicts may dampen this sector’s growth prospects.
The adjustment in spending patterns has also resulted in cost-cutting measures, including layoffs at major projects like Neom and reductions in consultancy fees paid to Western firms. Despite these developments and the cancellation of major investment events such as the FII, some market participants remain cautiously optimistic. A regional banker, speaking anonymously, emphasized that Saudi Arabia’s economy is predominantly domestic and suggested that current disruptions related to the conflict with Iran, which has persisted since late February, are temporary. They expressed the view that normal economic activity is expected to resume once hostilities subside.
Overall, while Saudi Arabia grapples with regional instability and economic recalibration, the kingdom’s long-term outlook remains centered on internal development and strategic reform, balancing immediate security concerns with ambitions for sustainable economic diversification.