MENA Deficit to Narrow in 2027, but Debt and Hormuz Risks Persist

RIYADH: The Middle East and North Africa's combined fiscal deficit is expected to narrow to 4.3 per cent of GDP in 2027, after widening to an estimated 6.2 per cent this year, according to BMI, the research arm of Fitch Solutions.

MENA Fiscal Deficit Seen Narrowing to 4.3% of GDP in 2027

BMI said the improvement would be supported by a recovery in oil and non-hydrocarbon revenues and lower subsidy costs. However, increased government spending across the Gulf Cooperation Council, particularly on post-conflict recovery and defence, is expected to limit the pace of fiscal consolidation.

The latest forecast represents a deterioration from BMI's previous estimate. The research unit had projected a 5.7 per cent deficit for 2026, but revised it higher after lowering its 2026 Brent crude price forecast to $84 a barrel from $88.

Oil exporters face wider deficits

BMI expects the combined fiscal deficit among the region's hydrocarbon exporters to widen from 4.5 per cent of GDP in 2025 to 5.4 per cent in 2026.

Hydrocarbon-importing economies are also expected to see their combined deficit increase, from 5.1 per cent to 5.7 per cent of GDP.

The outlook comes as regional economies continue to face pressure from conflict, disruptions to energy markets and weaker investment and trade activity.

The World Bank has separately warned that economic growth across the wider Middle East, North Africa, Afghanistan and Pakistan region could slow sharply in 2026 because of disruptions to energy production and transportation.

Hormuz remains a major risk

The Strait of Hormuz is emerging as one of the most important variables in the region's fiscal outlook.

BMI expects Iraq, Qatar, Bahrain and Kuwait to face some of the sharpest fiscal deterioration among hydrocarbon exporters because of their exposure to disruptions in the strategic waterway and their limited ability to reroute exports.

Kuwait is forecast to record the widest fiscal deficit in the GCC, with BMI's regional assessment putting the shortfall at 18.9 per cent of GDP for the financial year ending March 2027. A separate BMI country assessment places the deficit even higher, at 25.5 per cent for 2026-27.

Qatar's deficit is projected to increase from 0.9 per cent of GDP in 2025 to 4.5 per cent this year, while Bahrain's is expected to widen from 6 per cent to 8.4 per cent.

Iraq's deficit is forecast to rise from 5.1 per cent to 6.2 per cent of GDP.

Oman bucks the trend

Oman is expected to move in the opposite direction.

BMI forecasts the country's fiscal position to improve from a 1.1 per cent deficit in 2025 to a 2.1 per cent surplus in 2026.

The improvement follows the rerouting of all Oman's hydrocarbon exports and an 18.8 per cent increase in production during the first half of 2026, according to the report.

Algeria's deficit is also expected to narrow, from 14.8 per cent to 11.5 per cent of GDP.

Libya, meanwhile, is projected to return to a fiscal surplus after recording a deficit of around 30 per cent of GDP in 2025.

Saudi Arabia faces higher spending pressures

Saudi Arabia has managed to reduce some of the revenue impact from disruptions by rerouting an estimated 60-70 per cent of its oil exports through the East-West pipeline, according to BMI.

Despite this, the research firm expects Saudi Arabia's fiscal deficit to widen to 5.9 per cent of GDP, as increased capital spending absorbs part of the revenue gains.

BMI separately forecasts a 1.3 per cent contraction in the Saudi economy in 2026, followed by a projected 7.6 per cent expansion in 2027.

Debt burden continues to rise

The improvement in the regional fiscal balance is not expected to prevent government debt from increasing.

BMI forecasts aggregate government debt to rise from 47.8 per cent of GDP in 2025 to 48.2 per cent this year and 50.2 per cent in 2027.

Higher interest rates are expected to add to the pressure by keeping government debt-servicing costs elevated.

The burden is particularly significant in countries with high debt levels or substantial refinancing requirements.

Bahrain's government debt is above 140 per cent of GDP, while Egypt's debt-servicing costs accounted for 54 per cent of total government expenditure as of April, according to BMI.

Interest-rate cuts may be delayed

BMI has also revised its expectations for monetary policy.

The research firm had previously expected the US Federal Reserve and GCC central banks to cut policy rates by 50 basis points in 2026.

It now expects rates to remain unchanged as conflict-related inflationary pressures delay monetary easing.

That could increase borrowing costs for governments and businesses and make fiscal management more difficult, particularly in heavily indebted economies.

IMF and World Bank see a difficult 2026

Other international institutions have also lowered their expectations for regional economic performance.

The International Monetary Fund's July World Economic Outlook update projected growth across the Middle East and Central Asia to slow to 0.7 per cent in 2026, before rebounding to 6.5 per cent in 2027.

The IMF's 2026 projection was 1.2 percentage points lower than its April forecast, reflecting expectations of a prolonged disruption to the Strait of Hormuz and its impact on energy production and transportation.

The World Bank, using a different regional grouping, forecast MENA growth of 1.6 per cent in 2026, compared with 4 per cent in 2025. Growth among hydrocarbon exporters was projected at just 0.3 per cent.

The World Bank has cautioned that higher energy prices do not automatically translate into stronger fiscal positions for oil exporters, particularly when governments are simultaneously increasing defence and other spending.

The outlook remains vulnerable

BMI warned that renewed escalation in the region or a slower recovery in shipping through the Strait of Hormuz could push fiscal deficits higher.

Such a scenario would increase government borrowing requirements, keep financing costs elevated and potentially delay interest-rate cuts.

For the MENA region, the challenge is therefore twofold: governments must manage the immediate economic consequences of conflict while maintaining investment and development programmes designed to diversify their economies.

The projected decline in the regional deficit in 2027 offers some relief, but the underlying risks remain substantial.

The direction of oil prices, the reopening of regional trade routes and the duration of the conflict will remain critical to the region's fiscal and economic outlook.

— AALIMI NATION | Business & Economy Desk