On the stalling of major projects in Saudi Arabia

Over the past months, reports have surfaced about the delay in the completion of some major projects within Saudi Arabia, including the giant NEOM project. The first official statement about the delay in implementing some major projects emerged early December last year, when Finance Minister, Mohammed Al-Jadaan, stated that the Kingdom was delaying some projects that were launched as part of the economic transformation plan until after 2030. He also said that the Kingdom was forced to change the schedule for achieving the goals of the program, which is worth several trillion dollars, after his Ministry predicted that the general budget deficit will continue until 2026, in reference to the inability of expected oil revenues to reach the point of balance between the two sides of the budget.

In addition to financial factors, the Minister also justified the decision to extend these projects by trying to avoid huge inflationary pressures and supply and demand bottlenecks, and the need for a longer period to build factories and build sufficient human resources. He added that, after reviewing the project schedule, some of it could be delayed for three years, some until 2035, others beyond that and some of them will be streamlined.

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According to International Monetary Fund estimates, Saudi Arabia will need an oil price close to $86 per barrel to balance its budget, which is higher than its average this year. If expenditures by government-related entities, such as the Saudi sovereign wealth fund, the Public Investment Fund are added, the balance rate is likely to rise to $110 in the second half of this year.

Perhaps this confirms that the delay in implementation of projects is mainly due to the mounting financial pressures that the Kingdom’s budget has endured during the last period because of the intense spending on these projects, which require many years before they begin reaping their financial returns.

NEOM and ROSHN are at the forefront of the major projects

During the recent period, there have been reports of the stumbling of major Saudi projects that were promoted in accordance with Vision 2030, which includes the NEOM project, which is located in the north-west of the Kingdom on the Red Sea, the Red Sea project, which covers an area of 28,000 square kilometres on the western coast of the Kingdom, ROSHN, which aims to develop residential neighbourhoods with high-quality standards, the Qiddiya project, which is the future capital of entertainment, sports and arts, making it a unique global destination offering innovative and immersive experiences in the fields of entertainment, sports and arts, according to what the Saudi government says and, finally, the Diriyah City project, which is meant to become the cultural capital of the Kingdom, highlighting more than 300 years of authentic culture and history.

The truth of the matter is that sufficient feasibility studies for these projects were not published, and hundreds of millions of dollars were spent on redrawing the mental image of the Kingdom in its new entertainment appearance, but oil revenues were not sufficient to achieve the ambitions. Reports began to emerge stating that some projects would be stopped, while the implementation of others would be delayed. This has been happening since 2020, when Al Jazeera published satellite images showing the failing timeframes for the NEOM city project, which consists of 12 modern cities at international standards, with its first city, Riviera, scheduled to have appeared in 2020, but it has not appeared yet.

According to America’s Bloomberg, by 2030, Saudi Arabia hoped to have 1.5 million residents living in The Line, a futuristic city it seeks to build between a pair of mirror-covered skyscrapers, but officials now expect the city to accommodate less than 300,000 residents, by then.

The Line project was originally supposed to eventually cover an area of 170 kilometres along the coast but, according to recent data, officials expect to complete only 2.4 kilometres of the project by 2030 and, as a result, contractors have begun laying off a number of workers they employed at the site.

READ: Saudi Arabia to build world’s tallest buildings in the megacity NEOM

Saudi Arabia is forced to borrow

Under the burden of financing major projects and the failure of a jump in oil prices to the level that would, at least, achieve a balance of the State’s general budget, in addition to the failure to achieve its target of direct foreign investments, which was targeted to reach $100 billion last year, and the same in the following years, but the number only reached $33 billion. This is in addition to the decline in cash flows into the Saudi sovereign fund (the Public Investment Fund), which is suffering due to the lack of public assets that can be transferred, and this may explain the forced sale of shares of the oil giant, Aramco, as well as the continued borrowing from abroad by offering international bonds.

The Public Investment Fund has already sold bonds worth $7 billion since the beginning of 2024. The Kingdom began selling bonds in October 2016 when it sold $17.5 billion.

The National Debt Management Centre in Saudi Arabia announced, last November, that it had completed arranging a syndicated international loan amounting to $11 billion. This loan was arranged for a period extending over 10 years, with the participation of 14 international financial institutions around the world from Asia, the Middle East, Europe and the US.

Last January, the IFR publication, which covers capital markets, reported that Saudi Arabia intends to knock on the doors of the debt markets again, by selling record-sized triple-tranche bond with tenors of six, 10 and 30 years. It added that the Kingdom has set initial guidance prices for the three tenors around about 115, 135 and 195 basis points respectively, over UST bonds.

It is clear that this movement towards successive external borrowing by one of the world’s largest oil exporters was the result of major errors in the feasibility of Vision 2030 projects. The Saudi administration did well by announcing a reduction in the pace of implementation and postponement of some projects, but it is important to also adopt a new economic vision that is carefully studied by experts that are credible and transparent and are reviewed by loyal Saudi specialists before approval.

In general, and despite the succession of these loans, it is certain that the Kingdom’s economy has not slipped into danger, as the Kingdom’s debts constitute only about 26.5 per cent of the GDP by the end of 2023 (compared to 65 per cent in Germany and 112 per cent in France). The Saudi budget still enjoys large areas of manoeuvrability by reducing expenditures, supported by increasing possibilities for at least stable, and perhaps increasing, oil prices in light of the increasing geopolitical risks around the world and the increase in demand for black crude. This, in short, means that the debt risks to the Kingdom are still within the calculated and safe range, but it remains very important to anticipate what is coming.

READ: Saudi Arabia: tribesmen jailed for refusing NEOM displacement

This article appeared in Arabic in Al-Araby on 29 April, 2024.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.