Is Saudi Arabia maintaining its mega-project spending momentum?

In the desert of northwestern Saudi Arabia, a vast construction site full of cranes and pile drivers sits surrounded by recently built roads. A pair of tracks cut deep through the sand and form the backbone of what planners say is a high-speed rail system.

This skeletal infrastructure forms the basis of The Line. The Line is a multibillion-dollar, high-tech city where architects hope 9 million people will eventually live between two 166-mile-long glass skyscrapers more than 1,600 feet tall. It is said that it will be.

The project, with an estimated cost in the hundreds of billions of dollars, is the brainchild of Saudi Arabia’s Crown Prince Mohammed bin Salman, and is expected to attract millions of new residents to the region. Just one of the ultra-futuristic venues planned for Neom. Revolutionizing life and technology in Arabia and its countries. This is a core pillar of Vision 2030, which aims to diversify the Saudi economy away from oil revenues and create new jobs and industries for a rapidly growing young population.

The cost of Neom is estimated to reach $1.5 trillion. In the years since the plan was announced, Saudi Arabia’s Public Investment Fund, a giant sovereign wealth fund that currently manages $925 billion in assets, has poured billions of dollars into overseas investments and moved to Saudi Arabia to raise cash. The number of foreign investors jumping into the market continues to grow.

But this year has seen a sharp shift in spending, with an emphasis on keeping investment at home and reports of cost cuts for mega-projects like Neom. The changes come as Saudi Arabia’s deficit widens and the outlook for oil demand remains low, along with global oil prices.

The question then arises: Does Saudi Arabia have enough funds to achieve its lofty goals? Or do you need to be more flexible to ensure a sustainable spending trajectory?

A Gulf-based financier with years of experience in Saudi Arabia told CNBC: “The PIF’s widely known but now officially recognized focus on domestic investment still requires significant spending. That suggests that Saudi Arabia is pouring tens of billions of dollars into the project.” No financial benefit has been suggested yet. ”

The investor spoke on condition of anonymity because he was not authorized to speak to the press.

Andrew Lever, a Tulane University researcher who specializes in the political economy of the Middle East, doesn’t think the current pace of spending will continue.

“The number of ‘pay it forward and expect financial returns later’ gigaprojects currently underway is not sustainable,” Lever said.

“Having said that, the Saudi monarchy has shown a degree of flexibility whenever economic realities dictate. Ultimately, many projects have been quietly moved to get fiscal spending back on track. I think it will be shelved,” he added. Improving sustainability. ”

In October, Saudi Arabia cut its growth forecast for 2024-2026 and raised its budget deficit outlook, as spending is expected to rise and oil revenues to fall. According to the Ministry of Finance, this year’s real gross domestic product (GDP) growth rate is expected to be 0.8%, significantly lower than the previous forecast of 4.4%.

The Saudi economy also saw a dramatic swing from a $27.68 billion budget surplus in 2022 to a $21.6 billion deficit in 2023 due to increased public spending and a decline in oil production due to the OPEC+ supply cut agreement. The government forecasts a budget deficit of $21.1 billion in 2024, with revenues expected to be $312.5 billion and expenditures expected to be $333.5 billion.

Saudi authorities expect to continue running budget deficits in the coming years as they pursue their Vision 2030 plan, but added that they are well prepared for this.

“Our country’s non-oil revenues have increased significantly and now cover about 37% of our expenditures. This is a significant diversification and great reassurance that we can operate stably despite fluctuations in oil prices. ” Saudi Finance Minister Mohammed Al Jadaan told CNBC in October. “Our goal is to make sure the plan is stable and predictable.”

“We are not going to blink. We have significant financial resources and we are very disciplined about our fiscal situation,” he said.

Saudi Arabia has 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. This, combined with high foreign exchange reserves ($456.97 billion as of September, up 4% year-on-year, according to the country’s central bank), puts Saudi Arabia in a better position to manage its deficit, economists told CNBC. spoke.

Riyadh has been successful in issuing bonds, tapping more than $35 billion into the bond market so far this year. Saudi Arabia has also rolled out a series of reforms aimed at boosting and de-risking foreign investment and diversifying revenue sources, which S&P Global said in September will “continue to improve Saudi Arabia’s economic resilience and wealth. Probably.”

Asked whether Saudi Arabia’s spending trajectory is sustainable, Al-Jadaan said: “Yes, yes.” I think it’s possible,” he added.

Still, many analysts outside the Kingdom, as well as individuals within the Kingdom and involved in the NEOM project, remain skeptical about the feasibility of the megaproject. The report says some projects have been significantly scaled back, with the line’s scale target reduced from 106 miles to 1.5 miles and its population target lowered from 1.5 million to less than 300,000 by 2030. However, it proves the concern at a higher level.

Neom executives have confirmed that the current stage of work on The Line will make the building 1.5 miles long, which would still make it the world’s longest building. But the ultimate goal of 166 miles remains the same, they said, stressing that the city will not be built overnight and construction continues at a rapid pace.

Tariq Solomon, president emeritus of the American Chamber of Commerce in Saudi Arabia, said: “We are hopeful that there will be transparency and that some projects will be cut.”

“The increase in Saudi external borrowing reflects challenges in the feasibility of Vision 2030,” he told CNBC.

“Debt remains manageable at 26.5% of GDP, but continued small pressures are building up, highlighting the need for fiscal discipline and achievable targets.”

Mr. Solomon pointed to the desire of many Saudi residents to improve the infrastructure they use in their daily lives, including public transportation, connectivity, schools, and healthcare in Riyadh.

“Saudi Arabia’s path to recovery lies not in finding a ski resort in the desert, but in building one with innovation, complexity, and the courage to pursue something truly impactful.” said.