Can Saudi Arabia keep pace with its ambitious mega-project spending spree?

In Saudi Arabia's northwestern desert, a sprawling operation tract replete with cranes and heap drivers sits encircled by a recently-built road. A brace of tracks cuts done the tract similar heavy gashes done the sand, comprising the spine of what planners accidental volition beryllium a high-speed obstruction system.

The skeletal infrastructure forms the foundations of The Line, a multi-billion dollar high-tech metropolis that its architects accidental volition yet location 9 cardinal radical betwixt 2 106-mile agelong solid skyscrapers much than 1,600 feet high.

The project, whose estimated outgo is successful the hundreds of billions, is conscionable 1 of the hyper-futuristic venues planned successful Neom, the brainchild of Saudi Crown Prince Mohammed bin Salman and a portion that the kingdom hopes volition bring millions of caller residents to Saudi Arabia and revolutionize surviving and exertion successful the country. It's a halfway pillar of Vision 2030, which aims to diversify the Saudi system distant from lipid revenues and make caller jobs and industries for its burgeoning young population.

The outgo of Neom has been estimated to beryllium arsenic precocious arsenic $1.5 trillion. In the years since it was announced, Saudi Arabia's Public Investment Fund, the mammoth sovereign wealthiness money present overseeing $925 cardinal successful assets, has poured billions into overseas investments, with ever-increasing waves of overseas investors flying to the kingdom to rise cash.

This year, however, has seen a crisp alteration successful absorption successful presumption of spending, with a stated accent connected keeping investments astatine home on with reports of cutting costs connected megaprojects similar those successful Neom. The changes travel arsenic the Saudi shortage grows and the outlook for lipid demand, on with planetary lipid prices, sees sustained lows.

That begs the question: does Saudi Arabia person capable wealth to conscionable its lofty goals? Or volition it person to beryllium much flexible to marque its spending trajectory sustainable?

One Gulf-based financier with years of acquisition successful the kingdom told CNBC: "The PIF's pivot towards home investments, wide acknowledged but present officially admitted, suggests that determination is inactive a batch of spending needed. Saudi Arabia has poured tens of billions into projects that person yet to hint of immoderate fiscal returns."

The financier spoke anonymously arsenic they were not authorized to talk to the press.

Andrew Leber, a researcher astatine Tulane University who focuses connected the governmental system of the Middle East, believes that the existent gait of spending won't last.

"The fig of 'we wage up beforehand and anticipation for economical returns later' giga projects that are presently underway is not sustainable," Leber said.

"With that being said," helium added, "the Saudi monarchy has shown itself to beryllium somewhat flexible whenever economical realities asseverate themselves. I bash deliberation that eventually, a fig of projects volition beryllium softly shelved successful bid to bring its fiscal outlays backmost into greater sustainability."

Saudi Arabia successful October cut its maturation forecasts and raised its fund shortage estimates for the fiscal years 2024 to 2026 arsenic it expects a play of higher spending and little projected lipid revenues. Real gross home merchandise is present expected to turn 0.8% this year, a melodramatic driblet from a erstwhile estimation of 4.4%, according to the ministry of finance.  

The kingdom's system besides swung dramatically from a fund surplus of $27.68 cardinal successful 2022 to a shortage of $21.6 cardinal successful 2023 arsenic it ramped up nationalist spending and decreased lipid accumulation owed to its OPEC+ proviso chopped agreement. Its authorities forecasts a shortage of $21.1 cardinal for 2024, projecting gross astatine $312.5 cardinal and expenditures astatine $333.5 billion.

Saudi authorities expect that the fund volition stay successful shortage for the adjacent respective years arsenic it pursues its Vision 2030 plans, but they adhd that they are afloat prepared for this.

"Our non-oil revenues person grown significantly, present it covers astir 37% of expenditure. That's a important diversification, and that gives you a batch of comfortableness that you tin maneuver and beryllium unchangeable contempt the fluctuation successful lipid price," Saudi Finance Minister Mohammed Al-Jadaan told CNBC successful October. "Our purpose is to marque definite that our plans are unchangeable and predictable."

"We are not going to blink, we person important fiscal assets nether our disposal, and we are precise disciplined successful our fiscal position," the curate said.

Saudi Arabia has an A/A-1 credit standing with a affirmative outlook from S&P Global Ratings and an A+ standing with a unchangeable outlook from Fitch. That combined with precocious overseas currency reserves — $456.97 cardinal arsenic of September, a 4% percent summation year-on-year, according to the country's cardinal bank — puts the kingdom successful a comfy spot to negociate a deficit, economists told CNBC.

Riyadh is successfully issuing bonds, tapping indebtedness markets for much than $35 billion truthful acold this year. The kingdom has besides rolled retired a bid of reforms to boost and de-risk overseas concern and diversify gross streams, which S&P Global said successful September "will proceed to improve Saudi Arabia's economic resilience and wealth."

When asked if the kingdom's spending trajectory is sustainable, Al-Jadaan replied: "Absolutely, yes," adding that the authorities precocious published its numbers for the adjacent 3 years and that "we deliberation it is precise sustainable."

Still, galore analysts extracurricular the kingdom, arsenic good arsenic individuals moving wrong the kingdom and connected NEOM projects, are skeptical of the megaprojects' feasibility. Reports that immoderate projects person been dramatically chopped down — successful the lawsuit of the Line, its size people slashed from 106 miles to 1.5 miles and colonisation people down from 1.5 cardinal by 2030 to little than 300,000 — attest to that interest connected a higher level.

Neom executives admit that the existent signifier of enactment connected The Line is for a gathering magnitude of 1.5 miles — which would inactive marque it the longest gathering successful the world. However, the eventual extremity of 106 miles has not changed, they say, stressing that cities are not built overnight and that operation is continuing apace.

For Tarik Solomon, president emeritus astatine the American Chamber of Commerce successful Saudi Arabia, "it's promising to spot transparency and immoderate task cutbacks."

"The Kingdom's rising outer borrowing reflects challenges with Vision 2030 feasibility," helium told CNBC.

"Though indebtedness remains manageable astatine 26.5% of GDP, continued tiny pressures adhd up, underscoring the request for fiscal subject and achievable goals."

Solomon pointed to the tendency of galore Saudi residents for improvements to the infrastructure they usage successful their regular lives — similar Riyadh's nationalist transport, web connectivity, schools, and wellness care.

"The roadworthy to resilience for Saudi Arabia isn't successful figuring retired skis slopes successful the godforsaken but successful gathering with innovation, complexity, and the courageousness to prosecute what's genuinely impactful," helium said.