Saudi Arabia’s Ongoing Commitment to Ambitious Mega-Project Investments

In the arid landscape of northwestern Saudi Arabia, an expansive construction hub teeming with heavy machinery and cranes is emerging amidst newly paved roads. Two tracks slice through the sandy terrain, paving the way for what visionaries plan to be a rapid transit rail network.

This foundational infrastructure sets the stage for the ambitious $1 trillion high-tech development known as The Line, which aims to feature towering glass structures stretching over 160 miles and soaring above 1,600 feet. Planners predict that it will eventually house around 9 million residents.

The visionary initiative, spearheaded by Saudi Crown Prince Mohammed bin Salman, is a pivotal aspect of the nation’s Vision 2030 strategy aimed at reducing dependency on oil and fostering economic diversification through new jobs and industries to cater to a burgeoning youth demographic.

Projected to cost approximately $1.5 trillion, NEOM has seen the Saudi Public Investment Fund (PIF), with its $925 billion portfolio, allocate significant funds to global investments while simultaneously redirecting resources within the Kingdom to generate revenue. The influx of foreign investors into the Saudi market is on the rise.

However, a noticeable shift occurred this year, emphasizing domestic investment over foreign endeavors, alongside reports of budget cuts affecting major projects like NEOM. This reassessment arises in the context of a widening fiscal deficit and a stagnant outlook for oil demand, alongside fluctuating global oil prices.

This raises questions about Saudi Arabia’s financial capacity to fulfill its ambitious projects. Is there a need for more adaptable strategies to sustain fiscal spending?

A financial expert in the Gulf region noted to CNBC: “The PIF’s transition towards prioritizing local investments still necessitates substantial capital influx. This implies that Saudi Arabia is funneling tens of billions into these projects, without immediate financial returns.”

Speaking on the condition of anonymity, the investor could not share details publicly.

Andrew Lever, an expert on Middle Eastern political economies at Tulane University, believes the current spending rate is untenable. “The multitude of high-investment projects expecting delayed financial returns cannot be maintained,” Lever stated. “Nevertheless, the Saudi leadership has previously shown flexibility to adapt to changing economic realities, leading to adjustments in many projects to realign fiscal expenditures.”

In October, Saudi Arabia revised its growth forecasts for the 2024-2026 period downward and increased its budget deficit projections, anticipating a rise in public spending against a backdrop of declining oil revenues. The Ministry of Finance revealed that this year, the GDP growth is expected at 0.8%, a marked decline from an earlier estimation of 4.4%.

After experiencing a $27.68 billion budget surplus in 2022, the Kingdom is now confronting a $21.6 billion deficit in 2023 due to increased expenditures and reduced oil output resulting from the OPEC+ supply reduction agreement. The government estimates a budget shortfall of $21.1 billion for 2024, with projected revenues at $312.5 billion and expenditures hitting $333.5 billion.

Saudi officials anticipate continuous budget deficits in the forthcoming years as they pursue the initiatives outlined in Vision 2030, asserting their preparedness to manage these fiscal challenges.

“Our non-oil revenues have seen significant growth and now account for about 37% of our expenses. This is a noteworthy diversification and it assures stability in light of fluctuating oil prices,” remarked Saudi Finance Minister Mohammed Al Jadaan to CNBC in October. “We intend to maintain a stable and predictable plan moving forward.”

“We will not relent. Our financial reserves are substantial, and we remain disciplined regarding our fiscal approach,” he added.

Saudi Arabia currently boasts an A/A-1 credit rating with a positive outlook from S&P Global Ratings and an A+ rating with a stable outlook from Fitch. Coupled with foreign exchange reserves totaling $456.97 billion as of September (up 4% year-on-year), these factors bolster the Kingdom’s capacity to manage its deficit, according to economists commenting to CNBC.

Riyadh has effectively engaged in bond issuance, securing over $35 billion from the bond market this year. The Kingdom has also implemented various reforms to enhance foreign investment and diversify revenue streams, which S&P Global highlighted in September, strengthen Saudi Arabia’s economic resilience.

When questioned about the sustainability of Saudi Arabia’s spending trajectory, Al-Jadaan affirmed, “Absolutely. The government recently released projections for the next three years, asserting that we view it as highly sustainable. I believe it is feasible,” he affirmed.

Nonetheless, skepticism persists among analysts outside the Kingdom, as well as some insiders involved with the NEOM venture, regarding the viability of the megaproject. Reports suggest considerable scale-backs in certain initiatives, with the plan for The Line being scaled down from 106 miles to 1.5 miles, and its population goal revised from 1.5 million to fewer than 300,000 by 2030. These adjustments fuel broader concerns.

Executives from NEOM have confirmed that the ongoing phase of The Line will result in a structure measuring 1.5 miles long, which will still hold the title of the longest building in the world. However, they insist that the ultimate vision of extending it to 166 miles remains unchanged, emphasizing that the development will not happen instantaneously and that construction is ongoing at a brisk pace.

Tariq Solomon, former president of the American Chamber of Commerce in Saudi Arabia, expressed hope for transparency and the prudent scaling back of certain projects. “The rising levels of Saudi external borrowing reflect some challenges surrounding Vision 2030’s feasibility,” he explained to CNBC.

Although public debt remains manageable at 26.5% of GDP, ongoing pressures underline the need for fiscal discipline and realistic goals. Solomon advocated for prioritizing infrastructural improvements that directly impact citizens’ daily lives, such as public transport, connectivity, education, and healthcare in urban areas.

“Saudi Arabia’s recovery lies not in the spectacle of a ski resort in the desert, but rather in fostering innovative solutions, complexities, and courage towards truly impactful endeavors,” he concluded.