Financial Times: Saudi Arabia grapples with tough choices over cost of flagship projects
The Line development scaled back as Riyadh reconsiders priorities and how best to fund its myriad investments
The “sky’s the limit”, Mohammed bin Salman proclaimed in 2017, a year into his sweeping economic diversification plan that made Saudi Arabia a magnet for financiers and companies looking to tap into the accompanying splurge.
But the crown prince’s plans are facing a reality check as his ambitious Vision 2030 programme reaches its midway point, with repercussions for domestic projects and foreign spending that could ripple through global finance.
With foreign direct investment below expectations and global interest rates still high, the kingdom’s leaders are reconsidering priorities and how best to fund their myriad investments as self-imposed deadlines approach.
Construction at Neom, a futuristic zone that includes a planned “horizontal city” called The Line, is set to be smaller than announced, while a target to double Riyadh’s population to 15mn has been cut to 10mn, said people briefed on the plans.
The Line was meant to extend for 170km and eventually be home to 1.5mn residents, but project officials recently told visitors they were prioritising the “first module”, which would be much shorter and house a fraction of that number.
A person familiar with the thinking at the Public Investment Fund, the sovereign wealth fund behind the plan, said Prince Mohammed “might be finally ready to have some tough conversations” about which projects should progress and which can wait.
“I think the authorities are conscious of this,” said Amine Mati, head of the IMF’s mission for Saudi Arabia. “They’re recalibrating . . . to assess whether some spending needs to be postponed or not.”
The country’s economy is still performing, with the IMF forecasting GDP this year of 2.6 per cent, rising to 6 per cent in 2025. The government expects non-oil growth, which it considers a key indicator when assessing the performance of economic reforms, to be above 5 per cent in the medium term.
Saudi Arabia’s officials who spoke at a World Economic Forum event in Riyadh last month also sought to sound upbeat, while acknowledging “challenges” in funding and a squeeze on local banks’ liquidity.
“We don’t have ego,” finance minister Mohammed al-Jadaan said at the event. “We’ll change course, we’ll adjust, we’ll extend some of the projects, we’ll downscale some projects, we’ll accelerate some projects.”
Authorities have not said which projects would be placed in the different categories listed by Jadaan, but such decision will have an impact on critical choices ranging from borrowing limits to how much they can spend on foreign aid as part of diplomatic efforts to end Israel’s war in Gaza and ensure regional stability.
Amid the different projects undertaken to diversify the economy and unlock new sectors such as mining, tourism and entertainment, Neom is arguably the most closely associated with Prince Mohammed — and the most ambitious.
Neom has announced a dozen different projects in the Gulf of Aqaba since October, in addition to existing plans for The Line and the Sindalah resort island. The special zone was initially touted as a $500bn project, but bankers and analysts say the costs will be far higher.
There has long been scepticism about what Neom would ultimately deliver, with many analysts believing the plans were always overly ambitious. Even for the world’s top oil exporter, there have been questions about how Saudi Arabia would finance all the projects unveiled in recent years, with spending plans announced way in excess of $1tn dollars.
The PIF has become the main vehicle for Prince Mohammed’s ambitions. Other initiatives by the fund, which has $925bn of assets under management, includes a cube-shaped real estate development and an entertainment complex in the capital Riyadh, including the region’s biggest water park, which was unveiled this month.
The sovereign wealth fund is largely being funded by government cash transfers, debt, income from portfolio companies and privatisations. It has been the main recipient of the privatisation of Saudi Aramco, and has since had 12 per cent of the state oil company’s shares transferred to it. Bankers expect another share sale of Saudi Aramco could be used to bolster the PIF’s coffers.
Saudi Arabia has recently won the hosting rights for several major events, which will require significant investments.
The kingdom is set to host the football Asian Cup in 2024 and Expo 2030 and has emerged as the sole bidder for the 2034 Fifa World Cup. A $4.7bn contract was also signed with Italy’s WeBuild to develop a freshwater lake as part of a ski resort to host the Asian Winter Games in 2029.
“There’s not enough money for everything,” said an international banker. “There’s going to be a gap between the money that’s been invested [and] the returns from those investments. That will create questions, doubts, and they’re already downsizing some of those investments.”
Publicly, any talk about scaling back is quickly dismissed for fear of damaging the kingdom’s reputation and capability to pull off such grand undertakings.
“All projects are moving full-steam ahead. We set out to do something unprecedented and we’re doing something unprecedented,” economy minister Faisal Alibrahim said when asked about reining in the scope of The Line.
Fawaz Alamy, a former government official who led Saudi Arabia’s efforts to join the World Trade Organization, said pursuing aggressively ambitious targets is born out of a sense of urgency by the leadership that the country has lagged behind in its stated goals to diversify and must make up for lost time.
“Oil is not going to last for ever,” he said. “You have to be careful [and] you have to diversify.”
https://www.ft.com/content/f895c60a-8a36-4552-ba76-7a7ca0fec719