The Saudi economy is heading for a strong rebound in 2027, and France is facing a severe financial crisis

The Saudi economy is heading for a strong rebound in 2027 as the repercussions of the energy and trade disruptions subside. The World Bank expects the Kingdom’s gross domestic product to grow by about 7.9 percent next year, after an expected contraction of about 2 percent during 2026, at a time when the Strait of Hormuz crisis has shown that diversifying sources of growth is no less important than diversifying energy export paths and logistical infrastructure.

In an interview with Asharq Al-Awsat on the occasion of the issuance of the latest World Bank report on economic developments in the region, the chief economist for the Middle East, North Africa, Afghanistan and Pakistan at the World Bank, Roberta Gatti, told Asharq Al-Awsat that Saudi Arabia and the UAE were able to overcome the effects of closing the Strait of Hormuz better than some neighboring exporting countries. Thanks to them having alternative ways to export energy. She explained that Saudi Arabia redirected a large volume of oil exports via the “East-West” pipeline to the Red Sea ports, while the UAE’s ability to export hydrocarbons through Fujairah helped reduce its dependence on the strait.

Ghati believes that the crisis has strengthened, rather than weakened, the importance of economic diversification, but at the same time it has revealed another dimension of flexibility, which is the diversification of export paths. In her opinion, the diversification of economic and financial activity across different income sources and sectors must be accompanied by the diversification of trade routes, export infrastructure, and logistics networks.

This comes at a time when the World Bank expects the economy of the Middle East, North Africa, Afghanistan and Pakistan region to contract by about 2.1 percent in 2026, compared to a growth of 3.3 percent in 2025, while the economies of the Gulf Cooperation Council countries collectively are heading towards a contraction of 4.3 percent, in one of the most severe shocks to which the region has been exposed since the “Covid-19” pandemic. On the other hand, the World Bank expects regional growth to rebound strongly to 7.8 percent in 2027, if the conflict recedes and trade and export flows gradually return to normal, driven mainly by the restoration of production and export of hydrocarbons.

Saudi Arabia and flexibility

Ghati says that the conflict demonstrated a set of strengths that strengthened the ability of the Saudi economy to absorb the shock, most notably the large financial reserves, the continuation of economic diversification efforts, and the ability to redirect an important portion of oil exports through the Red Sea ports. These factors contributed to maintaining a degree of resilience to disruptions in trade and energy flows, compared to what the repercussions would have been in the absence of these alternatives.

It explains that the Kingdom's ability to diversify export routes was an important factor in reducing the impact of the Hormuz disruption, while the path of the economy during the coming period reflects the importance of continuing to invest in this flexibility. According to the latest World Bank forecasts, the Saudi economy is expected to contract by about 2 percent in 2026, before strongly regaining its momentum and growing by about 7.9 percent in 2027 as trade and energy flows gradually return to normal.

Ghati confirms that the performance of the economy would have been more affected had it not been for the existence of alternative export routes, especially through the “East-West” pipeline and the Red Sea ports.

The “Hormuz” shock hits Gulf exports

Ghati points out that the disturbance in the Strait of Hormuz had a significant impact on the World Bank’s growth forecasts. Regional output is expected to contract by 2.1 percent in 2026, a decrease of 5.7 percentage points from growth expectations that preceded the outbreak of the conflict in January.

This decline is largely due to the severe turmoil affecting oil and gas exporters in the Gulf, as the World Bank expects a contraction in all the economies of the Gulf Cooperation Council countries except the Sultanate of Oman during 2026.

The crisis led to a decline in the movement of oil tankers in the Gulf by more than half, and oil production in the region declined from about 26 million barrels per day to 16 million barrels per day in March.

Despite the magnitude of the shock, its global repercussions were more contained than would have been the case with a similar supply shortage. A previous surplus in the oil market, the redirection of some shipments outside the Strait, increased production in other regions, drawdowns on inventories, and reduced demand in East Asia helped absorb part of the shortfall.

But the differences between the economies of the Gulf countries were great. Countries most dependent on the Strait of Hormuz experienced larger declines in production, while alternative export routes in Saudi Arabia and the UAE helped limit the impact of the shock.

The World Bank expected the Qatari economy to contract by about 20.9 percent in 2026, the Kuwaiti economy by 14.6 percent, the Iraqi economy by 12.4 percent, and the Bahraini economy by 2.9 percent, at a time when the unrest affecting tourism, aviation, and logistics services added other burdens on economic activity.

Strong rebound in 2027

Ghati believes that the main channel through which the shock was transmitted to the Gulf economies was the decline in the volume of exports, in addition to the damage to infrastructure. If trade routes return to normal and energy exports resume, a large portion of the lost output is expected to be restored relatively quickly, which explains expectations of a strong rebound in 2027. As for Saudi Arabia, the World Bank expects the economy to grow by 7.9 percent next year.

But Gatti stresses the need to distinguish between recovery and recovery. Before a sharp decline in production, there is often a rapid rebound that reflects the restoration of production from low levels, and not necessarily a corresponding improvement in fundamental indicators or productivity.

According to the World Bank's basic scenario, the report assumes the continuation of the conflict until the end of 2026, followed by a de-escalation and a gradual return of trade to normal. Accordingly; Regional growth, excluding Iran, is expected to rise to 7.8 percent in 2027 as export flows return.

But repairing damaged infrastructure may take time, investments may remain on hold amid uncertainty, and financial reserves are weaker than before the crisis.

Gatti warns that rising shipping costs, declining investor confidence, falling tourism revenues, weak global demand, and tightening financing conditions could prolong the economic impact of the conflict beyond the end of the immediate disruptions.

Long periods of uncertainty may delay investments, weaken business confidence, and slow the accumulation of physical and human capital. This increases the risk that the temporary shock will turn into a permanent slowdown in growth.

The Gulf maintains a cost advantage

Despite the severity of the shock, Ghati believes that the economies of the Gulf Cooperation Council countries still have an important structural advantage, as they are among the lowest cost and most competitive in oil and gas production in the world.

As trade flows return to normal, these economies will, in their estimation, be well positioned to remain an important supplier to global markets. But the policy challenge is not limited to restoring economic activity in the near term, but rather extends to continuing to diversify economies, enhance their ability to withstand, and protect human and productive capital during the crisis.

Gati says these investments are necessary to ensure that temporary disruption does not turn into a permanent loss of growth potential.

Artificial Intelligence...the new diversification of productivity

In parallel with the energy crisis, Ghati believes that artificial intelligence can open a new source of growth and productivity in the region, but benefiting from its potential requires addressing three main gaps: localization, use, and basic capital, in addition to enhancing the dynamism of the private sector.

She explains that weak investment, training and innovation, as well as state dominance in some economies, corruption and political instability, limit the ability of companies to adopt technology and transform it into broad productivity gains.

A gap in the artificial intelligence system

The localization gap highlights the importance of data and local languages; Although Arabic is spoken by more than 500 million people, it represents less than 1 percent of global URLs, while local dialects remain a weak point in Arabic language models.

The two gaps in utilization and core capital are limited productive adoption of AI, a lack of digital skills, and uneven infrastructure. The region performs below the OECD average in innovative thinking, while mobile broadband subscriptions in eight economies, including Egypt, Iraq and Pakistan, are below the level expected according to their income.

Saudi Arabia and a growing regional role

According to Ghati, Saudi Arabia stands out as one of the most advanced artificial intelligence environments in the region. It rose from 33rd place among 36 economies in 2017 to 19th place in 2024 according to the Stanford Global Index of Artificial Intelligence Vitality.

It believes that the real test is to transform large investments in data centers and infrastructure into widespread adoption by companies, workers and public institutions, which will be reflected in productivity and growth of non-oil sectors. Saudi Arabia can contribute to building a regional artificial intelligence system through computing capabilities, data centers, and model development, while developing economies provide talent, sectoral expertise, and local data.

Regional cooperation is an opportunity to enhance flexibility

Ghati believes that the greatest risk to the 2027 prospects is the continued disruption of trade and energy flows, which may put pressure on investment, logistics services, tourism, and business confidence and delay recovery.

On the other hand, the crisis represents an opportunity to accelerate regional cooperation, especially in artificial intelligence. Gulf countries have the infrastructure and computing capabilities, while other economies have talent, data, and innovation. This integration can create new sources of growth, raise productivity, and enhance economic flexibility outside the oil cycle.

As for Saudi Arabia, Ghati believes that the Hormuz experience demonstrated the importance of combining economic diversification with trade and export routes. With the Saudi economy expected to grow by 7.9 percent in 2027, the opportunity lies in transforming the post-shock production rebound into more sustainable growth led by productivity, investment, and non-oil sectors, while continuing to strengthen the commercial and export infrastructure capable of facing future shocks.

France finds itself facing one of its most difficult financial crises in decades, after years of high government spending turned into an increasing burden on public finances, at a time when the cost of borrowing is rising and investor appetite for French bonds is declining, while the political system seems unable to agree on corrective measures capable of stopping the deterioration of the deficit and debt.

With the yield on French 10-year government bonds approaching 5 percent, the highest level since 2002, markets are increasingly concerned that the second largest economy in the euro area is entering a vicious circle, in which the cost of debt service rises, reducing the government’s ability to finance investments and social spending, which in turn leads to increased pressures on public finances.

France's debt amounts to about $4 trillion, or approximately 119 percent of the gross domestic product, while estimates indicate that the cost of debt service may reach about $100 billion in 2027. By 2030, the cost of debt service is expected to rise by about 59 percent, becoming one of the largest items of government spending, and may exceed military spending by the end of the decade.

The problem is not limited to the size of the current debt. France faces maturities exceeding $1 trillion until 2030, while it intends to issue nearly $380 billion in new debt next year, a record level, at a time when some traditional sources of demand for French bonds are no longer as strong as they were during the years of low interest rates.

The French Central Bank no longer buys government bonds, but rather allows its portfolio to shrink as the bonds mature, while Japanese asset managers who were stable investors in French bonds reduced their exposure to the market. As for the hedge funds that entered to cover part of the void, some of them suffered losses as market volatility intensified.

These data and numbers are based on reports published by the Wall Street Journal and the New York Times, which dealt with the escalation of debt and borrowing burdens in France, in addition to the protests, strikes, and political stagnation that precedes the presidential elections scheduled for the spring of 2027.

From “no matter what the cost” to the debt bill

The roots of the crisis go back to long years of high public spending, as France has not recorded a balanced budget since 1974. Over the decades, the state has expanded funding for a wide system of social services and government support, which has made reducing spending more difficult from an economic and political standpoint.

When Emmanuel Macron assumed the presidency in 2017, he presented himself as a reformer capable of returning public finances to a more disciplined path. He implemented labor market reforms, reduced corporate taxes, and abolished the wealth tax, measures that, according to his supporters, helped support growth and reduce the deficit to less than the European limit of 3 percent of output in the first years of his presidency.

But successive crises gradually prompted Macron to use government spending as a main tool to contain the unrest.

This began during the “yellow vest” protests, when the government allocated at least 10 billion euros to calm the protest movement, and then spending expanded significantly during the “Covid-19” pandemic and the energy crisis that followed the Russian invasion of Ukraine.

Macron's slogan during that period was "no matter the cost," referring to the government's willingness to provide financial support to companies and families, no matter how high the bill.

But some measures initially presented as temporary have turned into ongoing financial commitments. The government reduced corporate taxes by an additional 10 billion euros annually, raised the wages of workers in the public health care sector, and financed a broad program to support the wages of company workers during the pandemic.

Some support programs did not end after the closures ended. Businesses, from small restaurants to large institutions, continued to benefit from programs that were originally intended to serve as temporary support during the crisis.

The government then spent tens of billions of euros on subsidizing energy prices after the war in Ukraine, by setting a ceiling on electricity and gas prices, and part of these subsidies continued even after European gas supplies improved.

Errors in calculations reveal the size of the gap

The effects of this policy began to become clear in 2023, when the French Ministry of Finance discovered that tax revenues came in well below expectations, while some spending items exceeded its estimates.

In a confidential memorandum received by then-Finance Minister Bruno Le Maire in December 2023, Treasury officials warned of a shortfall in tax revenues, noting that an exceptional tax imposed on energy producers to recover part of the cost of subsidizing energy prices had generated only part of the revenues the government had expected.

Value-added tax revenues were also below target, while the cost of government spending was underestimated by about 3 billion euros.

Treasury officials estimated at the time that these errors could raise the 2023 budget deficit to 5.2 percent of output, compared to a previous estimate of 4.9 percent, which would have left a gap of about 9.2 billion euros in public finances.

The following February, another memo showed that the deficit could reach 5.6 percent in 2023, while the 2024 deficit could widen to 5.7 percent, compared to an estimate of 4.4 percent in the budget approved by Parliament.

Le Maire now has a gap of approximately 40 billion euros to fill, but he believes that the government cannot make cuts of the required size without the approval of Parliament.

Politics disrupts treatment

Here economic calculations collided with political reality.

The government needed to cut spending, but any attempt to pass sweeping austerity measures threatened to ignite a new confrontation within the National Assembly, divided between the far-right, the pro-Macron centre, and a broad left-wing coalition.

Former Prime Minister Gabriel Attal preferred to use the government's regulatory powers to make cuts without opening a broad parliamentary battle, fearing that the opposition would demand an increase in taxes in return, which might harm growth.

But the election factor was also present

With European Parliament elections approaching in June 2024, Macron has been reluctant to enter into a major financial confrontation with voters. After Marine Le Pen's National Rally party achieved strong results in the European elections, Macron made a surprising decision to dissolve the National Assembly and call early elections.

Instead of the election strengthening his position, the result resulted in a parliament divided into three main camps, making it more difficult to pass a budget that included deep spending cuts.

Since then, the French budget has become the hostage of repeated political negotiations, and prime ministers who tried to impose measures to restore discipline to public finances fell.

The French budget deficit has exceeded 5 percent of output over the past three years, while recent estimates indicate that it may reach 6.8 percent by 2030 if more stringent measures are not taken.

Markets begin to impose discipline

For investors, the problem is no longer just numbers in the budget, but rather an issue of the state's ability to make the decisions necessary to change course.

Markets have their say through bond prices.