Saudi Arabia is facing the most precarious moment in its economic reinvention. Eight years after the current Crown Prince Mohammed bin Salman unveiled Vision 2030, his blueprint for a life after oil, delays and cutbacks in the multi-trillion-dollar transformation of the economy are exposing the strain on the kingdom’s finances.
With its budget in deficit for six consecutive quarters, Saudi Arabia has become the largest issuer of international debt in emerging markets. And its decision to cut oil production with other OPEC+ members in 2023 has failed to substantially boost export revenues.
The kingdom’s oil profits have fallen by about a third from 2022 levels, when Brent crude averaged nearly $100 a barrel, thanks to Russia’s invasion of Ukraine. That’s weighing on the kingdom’s overall economic stability as it continues to spend on Prince Mohammed’s massive projects, which include everything from the new city of Neom to tourist resorts, soccer leagues and AI investments.
The vision is facing a reality check and there are adjustments to be made.
Goldman Sachs Group Inc. found that Saudi Arabia’s sovereign risk score—a measure that takes into account financial and governance metrics—worsened second only to Israel among emerging markets during the first half of the year. A Morgan Stanley rating in June came to a similar conclusion, with the kingdom among the “top laggards.”
The debt surge captures the changes in Saudi finances over the past decade. While still low by international standards, the government’s debt share of economic output has risen from 1.5 percent in 2014 and is on track to exceed 31 percent of GDP by the end of the decade, according to the International Monetary Fund.
The Saudi government and other entities, including banks, the wealth fund and oil giant Aramco, have raised more than $46 billion in dollar and euro bonds so far this year, meaning Saudi Arabia has surpassed China as the most prolific emerging-market issuer in international bond markets, according to data compiled by Bloomberg.
Still, the government has the flexibility — as it is already demonstrating — to reduce or delay investment in its so-called gigaprojects, according to Jim Krane, a senior fellow at the Baker Institute for Public Policy at Rice University in Houston.
The country’s external financial position is under pressure as it ramps up imports. The current account balance — the broadest measure of trade and investment — will fall to near zero in 2024 and turn into a deficit from next year, the IMF predicts, after posting a surplus of around 13% of GDP in 2022.
Local liquidity for Saudi banks remains stretched, as measured by the interest rates they charge each other for loans. The three-month Saudi Interbank Offered Rate has averaged a record high of more than 6% this year.
The IMF says the Saudi government needs Brent to be at nearly $100 a barrel to balance its budget, about $15 more than current levels. Bloomberg Economics estimates the breakeven price at $109 a barrel, once domestic spending by the Public Investment Fund — the sovereign wealth fund — is taken into account.
Foreign direct investment has been slow to materialize outside the oil and gas sector, making it harder for the crown prince to turn his ambitions into reality.
The government wants to attract $100 billion in foreign direct investment annually by 2030, roughly three times more than it has achieved so far. Net inflows reached about $2.5 billion during the first quarter, according to government data, a fraction of this year’s target.
FDI was just $12.3 billion in 2023, 60% less than neighboring United Arab Emirates, a much smaller economy, according to the United Nations Conference on Trade and Development.
Partly because of that, non-oil growth — a key indicator for the government — fell to its slowest pace since the coronavirus pandemic during the first quarter. That was one reason the IMF recently downgraded its forecast for Saudi Arabia’s overall economic expansion this year to 2.6%. By the end of 2023, it was forecasting 4%.
Still, the kingdom’s budget will be in the red for the next few years, meaning that national institutions like the PIF and Armaco will continue to be responsible for many of the major projects. Despite all the setbacks and pressures, the crown prince is determined to achieve his goals, even if they take a different form.
2024-07-15 21:44:27