IMF Warns Saudi Economy Shrinking Amidst Rising Middle East Conflicts

Saudi Arabia, a leading global oil exporter, is projected to experience a substantial economic contraction this year, according to a recent assessment by the International Monetary Fund (IMF) released on Tuesday. The IMF's latest World Economic Outlook report indicates a 3.3 per cent shrink in Saudi Arabia's Gross Domestic Product (GDP), attributing this regional decline partly to Iran's blockade of the crucial Strait of Hormuz.

The report was finalized before a devastating attack last Saturday on Riyadh’s international airport by Yemen’s Houthi rebels, which resulted in 13 fatalities. This incident marked the deadliest assault in Saudi Arabia in over a decade. The kingdom was already grappling with economic pressures stemming from Iran's control over the Strait of Hormuz, a vital passageway for oil and gas shipments, since the Middle East war erupted in February following US and Israeli actions against Iran.

The recommencement of Yemen's civil war in July has further exacerbated the situation for Saudi Arabia. The conflict pits a Saudi-led coalition, which supports the internationally recognized government, against the Houthi faction, bringing hostilities directly to Saudi soil. Houthi attacks have increasingly targeted Saudi oil infrastructure, oil tankers in the Red Sea (an alternative export route for Saudi Arabia), and key transportation hubs, including airports.

On Monday evening, the Saudi capital once again experienced blasts. The Saudi coalition confirmed intercepting a Houthi missile, while the Houthi group claimed responsibility for another strike on the airport, which remains non-operational. Mobile phone users in the evening received a government alert cautioning about a “hostile aerial threat” before the interception was announced.

Following Saturday’s airport attack, US President Donald Trump stated he was considering joining Saudi-led military actions against the Houthis, despite reportedly having previously declined Saudi requests for assistance. In response, Mohammed Al Bukhaiti, a member of the Houthi political bureau, issued a warning to AFP against US intervention, threatening to target American interests in the region. Bukhaiti emphasized that the objective of their campaign against Saudi targets is to convey a clear message to the crown prince: “that he can no longer wage aggression against Yemen from a safe position.”

Riyadh's coalition has provided military backing to Yemen's government since 2015, a prolonged civil war that has created a severe humanitarian crisis in the impoverished nation.

In its global report, the IMF forecasted a 0.3 per cent contraction for the regional economy this year, a sharp reversal from its earlier projection of 1.9 per cent growth six months prior. The fund pointed to “a longer closure of the Strait of Hormuz, compared with the baseline assumptions in the April” report, but anticipates a significant economic recovery in 2027, contingent on the waterway’s expected reopening. Since the Middle East war began in late February with US-Israeli strikes on Iran, Tehran has sought to assert control over the Strait of Hormuz, repeatedly attacking vessels that transit without its authorization. The US has, in turn, enforced its own counter-blockade on Iranian ports and has increased its escort of friendly ships through the strait.

The IMF noted that Saudi Arabia is among the least affected exporters in the region, largely due to its “economy with more diversified export routes.” The kingdom has utilized its East-West oil pipeline to bypass the Hormuz Strait and transport crude to its Red Sea coast. However, this pipeline was temporarily shut down in September after being struck in attacks blamed on Iran-backed groups operating from Iraq.