Saudi Arabia's Vision 2030 represents an ambitious blueprint for economic transformation, aiming to reduce the kingdom's overreliance on oil and cultivate a diversified economy. This grand strategy has spurred massive investments in giga-projects and a surge in public expenditure. Yet, the volatile nature of the global oil market has exposed the inherent challenges of this transition. The sharp decline in oil prices during the first half of 2024 underscored the kingdom's vulnerability to external shocks, as reduced revenues collided with persistently high spending.
In a bold move, Saudi Arabia started to cut billions of dollars in spending on some of its giga projects, and place other plans on hold, as the kingdom grapples with the scale of its vast economic makeover. The cuts mark a shift in priorities for Saudi Arabia, which under its Vision 2030 plan to reshape the economy has announced projects costing an estimated USD 1.25 tn. Lower oil prices, weaker-than-projected foreign investment and at least three more years of deficits in the national budget means it must now decide what to focus on first and at what pace. It is now clear that more spending might indicate more oil dependence.
Saudi Arabia’s funding challenges have been piling up. Therefore, the kingdom is working on finding alternative sources of funding to help cover an expected fiscal shortfall of about USD 21 bn this year. The government and other Saudi entities, including banks, the wealth fund and oil giant Aramco, have raised over USD 46 bn in dollar and euro bonds so far this year. That’s meant that Saudi Arabia has displaced China as the most prolific developing-nation issuer in international bond markets. Bond sales from Saudi Arabian entities have increased 8% so far this year and exceeded USD 33 bn. The government accounts for more than half of this, including a USD 5 bn dollar-denominated sukuk deal last month.
Meanwhile, the PIF faces its own constraints, becoming an active debt issuer itself and also encouraging its subsidiaries to borrow more. Aramco, whose dividends are a crucial source of cash for the government and the PIF, also raised USD 6 bn in its first bond sale in three years earlier in July. Part of the kingdom’s challenge now is to balance spending with meaningful increases in foreign direct investment.
In consequence, the International Monetary Fund (IMF) has downgraded its growth projections for Saudi Arabia by more than any other major economy it tracks, reflecting the kingdom’s decision to reduce oil supplies. The Fund lowers kingdom’s 2024 growth projection to 1.7% from 2.6% in April. It also lowered the projection for 2025 to 4.7% from 6%. The downward revision is entirely due to the impact of the production cuts. While Brent crude is up around 9% this year to just under USD 84 a barrel, it’s below what Riyadh needs to balance its budget. The IMF calculates the government needs a price of around USD 96 for that. Bloomberg Economics says the break-even price is even higher, at USD 109 a barrel, if the sovereign wealth fund’s domestic investments are included. The world’s biggest crude exporter lowered production to 9 mn barrels a day last year, roughly 1 mn barrels below its average of the past decade.
To conclude, Saudi Arabia is committed to its Vision 2030 strategy, which seeks to diversify the economy and reduce the country's reliance on oil. This vision has led to the initiation of several ambitious giga-projects and a significant increase in public spending. However, the first half of 2024 has underscored the complexities of this transformation. A decline in oil prices resulted in reduced revenues, while the pace of public spending continued unabated, exacerbating the fiscal deficit. In response, the government had to make strategic adjustments, including scaling back on major initiatives and turning to debt issuance to manage the financial shortfall. These developments highlight the persistent challenge of oil dependency, illustrating the ongoing struggle to break free from a cyclical reliance on oil revenues while striving to meet ambitious diversification goals. It is as if Saudi Arabia is shooting a moving target!
To sustain its ambitious economic transformation and ensure long-term financial stability, Saudi Arabia needs to adopt a more focused public spending strategy; prioritizing the most efficient and productive projects over splashy, high-profile initiatives.
