Riyadh - Morgan Stanley has lowered its forecast for Saudi Arabia's economic growth after concluding that real oil-sector activity will remain in contraction through the third quarter of 2026. The downgrade reflects the bank's assessment that weaker oil export volumes and trade disruptions are weighing on headline real growth, even as higher oil prices underpin government revenue and spending.
The investment bank kept an overweight recommendation on Saudi Arabia within its EEMEA coverage universe, arguing that the kingdom continues to demonstrate resilience against persistent geopolitical strains and the ongoing energy shock. According to Morgan Stanley, Saudi Arabia's capacity to re-route a meaningful portion of its oil exports away from the Strait of Hormuz gives it an advantage in the region, particularly in a higher-for-longer oil price environment.
Firm analysts also point to the Kingdom's relatively low dependence on expatriate labor compared with peers in the Gulf Cooperation Council as an additional buffer. That structural characteristic, the bank says, contributes to Saudi Arabia's ability to absorb the current drag on growth.
Morgan Stanley expects that fiscal support measures and resilient private consumption will soften the near-term impact on the economy. The bank projects a stronger rebound in 2027 once oil export volumes recover and lift headline growth, although the current projection assumes the contraction in real oil activity persists into Q3 2026.
On the financial side, the firm reports signs of improving system liquidity combined with ongoing fiscal support. Morgan Stanley anticipates acceleration in investment related to energy security and infrastructure, and it forecasts this investment push to support further earnings expansion across corporate sectors.
Within that outlook, Morgan Stanley favors exposure to banks, financials, energy and industrials. The bank views these sectors as best positioned to benefit from the current oil-driven macro backdrop and the policy responses it expects to accompany elevated oil revenues.
Analysis
The bank's revised forecast underscores the dual dynamics at play: a contraction in physical oil-sector activity that depresses real output, and simultaneously stronger fiscal capacity derived from higher oil prices that helps sustain government spending and private demand. Morgan Stanley's stance reflects a balance between these forces, with policy support expected to smooth the transition until export volumes recover.