A shadow in megaproject paradise? Saudi Arabia is emerging from a frenzied decade of investment shambles and explosions in spending — the PIF, the Saudi sovereign fund, spent $31.5 billion in 2023, when all sovereign funds spent $123 .8 billion dollars.
The ambitious Vision 2030 plan, intended, among other things, to free the country from its dependence on petrodollars, combines pharaonic projects including Neom, a futuristic complex on the shores of the Red Sea, some 1,460 kilometers from Riyadh, and Diriyah. Gate, a commercial and residential area at the gates of the capital.
Estimated investment for the whole? 565 billion dollars, and these are only two of the five megaprojects developed by the PIF. At the same time, the Fund has created 93 domestic companies, ranging from a Saudi coffee entity to mortgage, waste recycling and gaming companies, with the aim of creating new industries.
Added to this is an aggressive strategy of soft powerwhich swallows billions, including the organization of the Asian Football Cup in 2027, the Asian Winter Games in 2029 and Expo 2030. The kingdom is also the only candidate for the organization of the FIFA World Cup in 2034. Once dormant, the PIF has become one of the Gulf's most high-profile and largest sovereign wealth funds.
A financial “recalibration” for a spendthrift Saudi Arabia
From now on, a period of “recalibration” awaits the kingdom, explains the Financial Times in an analysis published on October 16. The kingdom of the Arabian Peninsula becomes familiar with an unknown concept in its economy: prudence, and changes the situation. First pitfall: the (too) slow “diversification” of the economy, which still leaves Riyadh at the mercy of the vagaries of oil prices.
While non-oil exports have increased, to 24.2% of non-oil GDP, they are “well below” the 50% target, according to Capital Economics. Despite an attractive tax policy and regulations, the kingdom also struggles to attract foreign direct investment. Still according to Capital Economics, direct investment flows amounted to $12.3 billion in 2023, when Prince Mohammed bin Salman's (MBS) target is $100 billion per year by 2030.
Even the oil sector is a vector of uncertainty in the country of black gold, on which the government remains dependent for nearly two thirds of its budget and more than 70% of its export revenues. The International Monetary Fund estimates that the kingdom needs a barrel of crude oil at $96 to balance its budget, and Bloomberg Economics economists are even leaning towards $112, Gulf Time recalls. We are far from it since the barrel of Brent is currently hovering around $70, squeezing state revenue.
Increased tensions in the Middle East and the popularity of Russian crude on the Asian market add uncertainty about the revenues to be derived from oil. In this context, “we are increasingly wondering, particularly with the fall in oil prices, about the returns of the PIF”explains a Fund insider to the Financial Times.
“A little pragmatism”
On the maxi-project side, the time for wonder has passed: make way for reality. The Fund faces questions about overheating of the economy linked to project spending. The Line, a slender and ultra-modern city in the middle of the desert, will only offer a handful of kilometers to its first inhabitants in 2030, compared to the 170 km initially planned. Neom is burdened by delays, and will cost nearly $150 billion more than announced (so $500 billion in total).
At the Financial Times, an executive at a consulting firm working with government entities says many projects are not on time or on budget. “There is simply a fundamental need for recalibration”he declares.
I do not have the impression that this means a reduction in ambition, but only a little pragmatism and recognition of the complexity of implementing these projects.
“Everyone tightens their belts”says another executive at a consulting firm, adding that Neom's spending on consultants has fallen 20 to 30 percent over the past six months.
And if many sector players want to remain optimistic, the figures do not lie. In a report published at the end of September, the Saudi Kingdom's Ministry of Finance revised its economic forecasts downwards. GDP growth will not be 4.4%, but only 0.8% this year. The authority, however, hopes for a rebound to 4.8% in 2025, thanks to growth in non-oil sectors.
The budget deficit will widen, to 2.9% of GDP for 2024. For 2025, it would reach 2.3% of GDP before widening a little further to 3% in 2027. The ministry has already already planned to reduce its spending by 5% for next year, but Prince MBS's Vision 2030 remains untouchable.
Article originally published on October 17.
