Can Saudi Arabia sustain its rapid spending on ambitious mega-projects?

• The estimated cost of Neom could reach up to $1.5 trillion.
• This year, there has been a significant shift in spending patterns for the kingdom.
• According to a financier who spoke to CNBC, Saudi Arabia has invested huge sums of money into projects with no indication of financial gain yet.

In the northwestern desert of Saudi Arabia, a construction site with cranes and pile drivers surrounds a newly built road. Two tracks, resembling deep cuts in the sand, form the backbone of what planners claim will be a high-speed rail system.

The multi-billion dollar high-tech city, The Line, is being built on a skeletal infrastructure that will eventually house 9 million people between two 106-mile long glass skyscrapers more than 1,600 feet high.

The project, estimated to cost hundreds of billions, is one of the futuristic venues planned in Neom, a region that Saudi Crown Prince Mohammed bin Salman envisions as a hub for millions of new residents and technological advancements in the kingdom. It is a key component of Vision 2030, which aims to shift the Saudi economy away from oil revenues and create new jobs and industries for its growing young population.

The estimated cost of Neom, the futuristic city being developed in Saudi Arabia, is as high as $1.5 trillion. Since its announcement, Saudi Arabia's Public Investment Fund, which now oversees $925 billion in assets, has invested billions overseas, attracting ever-increasing waves of foreign investors to the kingdom to raise cash.

This year, there has been a significant shift in spending direction, with a focus on keeping investments domestic and cutting costs on large-scale projects such as those in Neom. This change is due to the growing Saudi deficit and the sustained lows in oil demand and global oil prices.

Will Saudi Arabia have enough funds to achieve its ambitious objectives, or will it need to adjust its spending trajectory to ensure sustainability?

A Gulf-based financier with extensive experience in the kingdom stated to CNBC that the PIF's shift towards domestic investments, which has been widely acknowledged but now officially confirmed, implies that there is still a significant amount of spending required. Saudi Arabia has invested tens of billions of dollars in projects that have yet to show any financial returns.

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

A researcher at Tulane University, Andrew Leber, who specializes in the political economy of the Middle East, predicts that the current rate of expenditure cannot continue indefinitely.

"The current number of 'we pay up front and hope for economic returns later' giga projects is not sustainable, according to Leber," said.

"He stated that the Saudi monarchy has demonstrated some flexibility when economic realities come into play. However, he believes that in the future, several projects will be quietly put on hold to help balance its fiscal spending."

The ministry of finance in Saudi Arabia has revised its growth forecasts and budget deficit estimates for the fiscal years 2024 to 2026. Real GDP growth is now projected to be 0.8% this year, a significant decrease from the previous estimate of 4.4%, due to higher spending and lower projected oil revenues.

In 2022, the kingdom's economy had a budget surplus of $27.68 billion, but by 2023, it had swung to a deficit of $21.6 billion due to increased public spending and decreased oil production as part of its OPEC+ supply cut agreement. The government projects a deficit of $21.1 billion for 2024, with projected revenue of $312.5 billion and expenditures of $333.5 billion.

Saudi authorities anticipate that the budget will continue to be in deficit for the upcoming years while they work towards their Vision 2030 goals, yet they assure that they are fully prepared for this situation.

""Our non-oil revenues have grown significantly, now accounting for approximately 37% of our expenditure. This diversification provides comfort in managing our finances despite fluctuations in oil prices. Our goal is to maintain stability and predictability in our plans," Saudi Finance Minister Mohammed Al-Jadaan stated in an interview with CNBC in October."

The minister stated that they have significant fiscal resources and are very disciplined in their fiscal position, so they will not blink.

Saudi Arabia has a positive outlook from S&P Global Ratings and a stable outlook from Fitch, both of which have given it an A/A-1 and A+ rating respectively. Additionally, the country has high foreign currency reserves, with $456.97 billion as of September, a 4% percent increase year-on-year, according to its central bank. This puts the kingdom in a comfortable position to manage a deficit, as economists told CNBC.

Saudi Arabia has successfully issued bonds and tapped debt markets for more than $35 billion this year. Additionally, the kingdom has implemented reforms to attract foreign investment and diversify revenue streams, which S&P Global stated in September would enhance Saudi Arabia's economic resilience and wealth.

Al-Jadaan confirmed that the kingdom's spending trajectory is sustainable, stating that the government recently published its numbers for the next three years and believes it is very sustainable.

Despite the doubts of many analysts and individuals, both inside and outside the kingdom, as well as reports indicating that some projects have been significantly reduced, such as the Line's size target being cut from 106 miles to 1.5 miles and its population target being reduced from 1.5 million to less than 300,000 by 2030, there are still concerns about the feasibility of the megaprojects.

The current phase of work on The Line is for a building length of 1.5 miles, which would still make it the longest building in the world. However, the eventual goal of 106 miles has not changed, and the construction is continuing at a fast pace, say Neom executives.

Transparency and project cutbacks are promising for Tarik Solomon, chairman emeritus at the American Chamber of Commerce in Saudi Arabia.

He told CNBC that the Kingdom's increasing external borrowing indicates difficulties in achieving the feasibility of Vision 2030.

"Despite the manageable debt at 26.5% of GDP, the accumulation of small pressures highlights the importance of fiscal discipline and attainable objectives."

Many Saudi residents desire improvements to their daily life infrastructure, including Riyadh's public transport, network connectivity, schools, and health care.

"The path to resilience for Saudi Arabia lies not in discovering ski slopes in the desert but in embracing innovation, intricacy, and the bravery to pursue what truly matters," he stated.