Saudi Arabia keep pace with its mega-project spending spree? | Global News Avenue

In the desert of northwestern Saudi Arabia, a massive construction site is filled with cranes and pile drivers and surrounded by a newly constructed road. Two tracks cut through the site like deep cuts in the sand, forming what planners call the backbone of the high-speed rail system.

Skeleton infrastructure forms the basis of The Line, a multibillion-dollar high-tech city that its architects say will eventually house 9 million people between two glass skyscrapers 106 miles long and more than 1,600 feet tall people.

The project, expected to cost hundreds of billions of dollars, is just one of Naom’s planned ultra-futuristic venues and is the brainchild of Saudi Crown Prince Mohammed bin Salman, who hopes the area will bring millions of new residents to the kingdom. and revolutionizing life and technology in the country. It is a central pillar of Vision 2030, which aims to diversify the Saudi economy away from dependence on oil revenues and create new jobs and industries for its rapidly growing young population.

The cost of Neom is Estimates as high as $1.5 trillion. Since the announcement, Saudi Arabia’s Public Investment Fund, a massive sovereign wealth fund that currently manages $925 billion in assets, has poured billions of dollars into overseas investments, with an increasing number of foreign investors pouring into the kingdom to raise cash.

This year, however, there has been a sharp change in the direction of spending, with a clear emphasis on Keep investments at home together with cost cutting report Large projects like Neom. The changes come amid growing Saudi deficits, oil demand prospects and continued low global oil prices.

This begs the question: Does Saudi Arabia have enough money to achieve its lofty goals? Or will it have to be more nimble to make its spending trajectory sustainable?

A Gulf financier with years of experience in Saudi Arabia told CNBC: “The PIF’s shift to domestic investment has been widely recognized, but now that it is officially recognized, it shows that there is still a lot of spending required. Saudi Arabia has poured tens of billions of dollars into projects but has not yet Any financial return is implied.”

The financier spoke anonymously because they were not authorized to speak to the media.

Andrew Leiber, a researcher at Tulane University who studies the political economy of the Middle East, doesn’t think the current pace of spending can continue.

“The number of ‘let’s pay first and then hope for a financial return’ mega-projects currently underway is unsustainable,” Leiber said.

“Having said that,” he added, “the Saudi monarchy has shown some flexibility whenever economic realities set in. I do think that, ultimately, some projects will be quietly shelved in order to bring their fiscal spending back into Budget scope.” Greater sustainability. “

Saudi Arabia October Lowered growth forecasts It also raised its budget deficit forecast for fiscal years 2024 to 2026 as spending is expected to rise over a period of time and oil revenues are expected to fall. Real GDP is now expected to grow by 0.8% this year That was a sharp drop from the previous estimate of 4.4%, according to the Treasury Department.

The country’s economy has also swung sharply from a budget surplus of $27.68 billion in 2022 to a deficit of $21.6 billion in 2023 due to increased public spending and reduced oil production due to the OPEC+ production cut deal. The government projects a deficit of $21.1 billion in 2024, with revenue of $312.5 billion and expenditures of $333.5 billion.

Saudi authorities expect the budget to continue to run deficits in the coming years as they pursue their Vision 2030 plans, but add that they are fully prepared for this.

The Saudi Finance Minister said: “Our non-oil revenues have grown significantly and now account for around 37% of expenditures. This is significant diversification, which gives you a sense of comfort that despite oil price fluctuations, you can still maneuver and maintain Stable,” Mohammed Al-Jadaan told CNBC in October. “Our goal is to ensure our program is stable and predictable.”

“We are not blinking, we have significant financial resources and we are very disciplined in our fiscal position,” the minister 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 Ratings. Coupled with high foreign exchange reserves – US$456.97 billion as of September, a year-on-year increase of 4%, According to the country’s central bank Economists told CNBC that this allows Saudi Arabia to easily manage its deficit.

Riyadh successfully issues bonds, Leveraging debt markets to raise more than $35 billion So far this year. Saudi Arabia has also introduced a series of reforms to promote and de-risk foreign investment and diversify revenue streams, which S&P Global said in September “will continue to improve Saudi Arabia’s economic resilience and wealth” .

Asked whether the kingdom’s spending trajectory was sustainable, Al-Jadaan replied: “Of course, yes,” adding that the government had recently released data for the next three years and “we think it’s very sustainable.” .

Still, many analysts outside the Kingdom, as well as individuals working within the Kingdom and on the NEOM project, are skeptical of the feasibility of the large-scale project. Report Dramatic cuts to some projects – in the case of high-speed rail, where the size target was cut from 106 miles to 1.5 miles, and the population target was slashed from 1.5 million to less than 300,000 by 2030 – underscore this concern at a higher level.

Neom executives acknowledged that the current phase of work on The Line is to build 1.5 miles of building length, which would still make it the longest building in the world. However, they said the end goal of 106 miles had not changed, stressing that cities were not built overnight and construction was still proceeding apace.

For Tariq Solomon, chairman emeritus of the American Chamber of Commerce in Saudi Arabia, “there is hope for transparency and some program cuts.”

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

“While debt at 26.5% of GDP remains manageable, continued minor pressures add up to underlining the need for fiscal discipline and achievable targets.”

Solomon noted that many Saudi residents want improvements to the infrastructure they use in their daily lives, such as public transportation, internet connectivity, schools and healthcare in Riyadh.

“Saudi Arabia’s path to resilience is not about building ski resorts in the desert, but about building through innovation, complexity and the courage to pursue real impact,” he said.