Saudi Arabia’s sweeping diversification drive has transformed the structure of its economy, but the next phase must focus on quality and productivity rather than scale, as oil market dynamics continue to shape non-oil performance, according to PwC.

In its latest Saudi Economy Watch 2025, PwC argues that while non-oil activity has expanded rapidly under Vision 2030 — now accounting for around 56% of the Kingdom’s SAR4.7 trillion ($1.25 trillion) economy — growth remains materially linked to hydrocarbon revenues. 

As fiscal conditions tighten amid softer oil prices, sustaining expansion through capital deployment alone will become increasingly difficult, the report says.

Non-oil fiscal revenues have more than doubled since 2017, reflecting structural reforms, large-scale public investment and rising private sector participation. Major giga-projects, policy coordination through Vision Realisation Programmes, and the catalytic role of the Public Investment Fund have supported the emergence of new sectors spanning tourism, advanced industrials and automotive manufacturing.

Yet PwC cautions that headline diversification gains mask continued sensitivity to oil price movements. In 2025, softer oil prices reduced projected fiscal revenues by 13.3% year-on-year, contributing to a more constrained expenditure environment and underscoring how the scale and timing of non-oil investment remain influenced by hydrocarbon income.

The linkage is not only fiscal. Productivity indicators suggest recent non-oil growth has been driven primarily by capital investment, labour force expansion and public-sector support, while total factor productivity has moderated since the mid-2010s. This, PwC notes, highlights the need for efficiency improvements, innovation and stronger private-sector-led productivity growth.

Oil revenues influence non-oil economic performance

First, oil prices shape fiscal space and the pace of public investment. Periods of high prices have enabled rapid capital deployment, infrastructure expansion and broad demand support across non-oil sectors. However, when prices soften, expenditure is reprioritised, borrowing pressures rise and investment pipelines slow. This underscores the need to use limited fiscal resources to build lasting productive capacity rather than activity with limited long-term economic returns.

Second, oil market conditions influence investment behaviour, particularly from foreign investors. Domestic business sentiment has become more resilient, with PMI readings remaining in expansionary territory even during periods of softer oil prices. External capital, however, remains sensitive to fiscal outlooks, public spending trajectories and the credibility of long-term growth, contributing to flatter FDI inflows during recent periods of oil price weakness.

Third, oil prices affect the external position and the availability of foreign exchange needed to finance diversification. Foreign exchange reserves support imports of capital goods, technology and specialised services critical to non-oil growth. When oil revenues weaken, external buffers come under pressure, funding conditions tighten and non-oil projects may be delayed or scaled back. This reinforces the importance of building non-oil exports that generate stable foreign currency earnings and reduce reliance on oil-funded reserves.

PwC says its estimates indicate that a 10% change in oil prices is associated with around a 0.5% change in non-oil GDP.

To put this in perspective, a 10% dip in oil price sustained over three years, would represent a cumulative loss of non-oil GDP of around SAR430 billion, against baseline non-oil GDP growth. If non-oil GDP were only half as sensitive to oil price movements, the cumulative loss of non-oil GDP over the three years would be limited to only SAR215 billion. This highlights the risk that oil price swings pose to the non-oil economy, as well as the importance of reducing the dependence of non-oil GDP growth on the oil economy.

Strengthening productive capability

PwC argues that diversification must evolve from expanding output to strengthening the foundations of sustainable growth. Capital allocation should become more selective, targeting activities that build productive capabilities, generate scalable exports and attract private investment capable of sustaining momentum with lower reliance on oil revenues.

The report outlines an export-oriented growth framework centred on competitiveness, domestic value creation, skills development and targeted public–private risk sharing. Anchoring investment decisions in export potential and productivity gains, PwC says, would help shift the Kingdom’s economic model from investment-led expansion to more resilient, self-sustaining growth.

While Saudi Arabia’s diversification strategy has delivered measurable structural change in under a decade, PwC concludes that the coming phase will be defined less by the pace of expansion and more by the durability and efficiency of that growth in a world of volatile oil markets and tighter fiscal conditions. -TradeArabia News Service