Saudi Arabia bleeding funds for Vision 2030: Broken economic model

By Al Mayadeen English
Source: Bloomberg
6 Apr 2024 22:38
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Bloomberg reports that the Kingdom has found itself paying investors to build its ambitious projects and doing most of the financial heavy lifting rather than attracting foreign cash.

Crown Prince Mohammed bin Salman announcing his economic reform plan known as "Vision 2030" in Riyadh, Saudi Arabia, in April 2016 (AFP)

Saudi Arabia's ambitious Vision 2030 of economic transformation is on shaky grounds as the Kingdom finds itself having to pay out of pocket for investors to come rather than the other way around, leading to a financial bleed in the oil-rich country's funds, Bloomberg revealed in a report.

According to the report, Saudi Arabia has understood for some time that its funding needs would primarily be supported by local capital, with only a portion coming from foreign sources.

Despite this, the country aims to reach $100 billion in foreign direct investment (FDI) annually by 2030, a goal significantly larger than its historical achievements and about 50% more than what India currently attracts.

From 2017 to 2022, the Kingdom averaged just over $17 billion in annual FDI inflows. Meanwhile, the 2023 FDI target is set at about $19 billion according to the country's Investment Ministry.

Aiming to showcase its departure toward a modernized economy, Riyadh inked a partnership with US-based electric vehicle maker Lucid. But Saudi Arabia found itself required to do all the heavy lifting.

Last week, the EV producer received a $1 billion injection from Saudi Arabia, adding to the $5.4 billion already invested by Saudi Arabia’s Public Investment Fund (PIF).

Lucid, like many other firms, has PIF as its largest shareholder. The company was previously seen as a prime example of a foreign company investing in Saudi Arabia's Vision 2030 plan, which aims to diversify the country's economy away from oil dependency.

The initial assembly of EVs in Saudi Arabia with Lucid was meant to demonstrate how a kingdom reliant on one commodity for revenue could attract foreign investment and become a global center for future industries.

However, Lucid's requirement for the Kingdom's funding indicates that the country's hurried economic reform efforts are being financed directly from Riyadh's own treasure boxes, with Saudi Arabia heavily relying on its oil wealth to attract companies.

“The government had to give Lucid tremendous incentives to come,” said Karen Young, a Gulf-focused political economist focusing on the Gulf at the Columbia University Center on Global Energy Policy.

The Chief Executive Officer of Lucid, Peter Rawlinson, told Bloomberg that the company is "fully committed to our long-term partnership with the PIF and supporting the goals of Saudi Arabia’s Vision 2030” and that it is "creating hundreds, and eventually thousands, of new employment opportunities for Saudi talent.”

Out of reach

Reaching the 2030 goal appears to be unattainable presently, with foreign investors showing caution, Bloomberg reported, citing bankers, legal advisors to investors, and individuals knowledgeable about Saudi Arabia's fundraising efforts.

This cautious approach has prompted the government to reassess its strategy, considering the possibility of financing a larger portion of its economic transformation itself, within a tight timeline.

Already, there are signs of scaling back on large-scale projects aimed at revitalizing its $1.1 trillion economy. Additionally, the government is issuing billions of dollars in bonds to help address a fiscal deficit that it had not anticipated until late last year.

The government's decisions on how to allocate its funds will have implications on its domestic and international investments, as well as on its oil policies, which influence global markets, the newspaper said.

A spending cycle

Crown Prince Mohammed bin Salman (MBS) aims to attract foreign investors to contribute expertise and funding for megaprojects, such as the development of Neom—a $500 billion plan to transform a remote north-western desert region into a carbon-free high-tech hub with robotics.

Despite marketing efforts and investor roadshows, Neom has not yet made significant progress in raising capital.

Other projects, like the entertainment city Qiddiya near the capital, also face challenges. While Qiddiya has over 1 trillion riyals ($266 billion) in committed spending, this is solely backed by PIF and a Saudi developer it owns.

“If we don’t have clear evidence of more funding by the end of the year, then it’s certainly worth asking where the money is going to come from for these projects,” said David Dawkins from UK-based investment data firm Preqin, which analyzes Saudi trends. “They are insanely expensive.”

The approval delays for regulations concerning Neom have raised concerns among investors. Their hesitance to invest in the Kingdom is often attributed to the unclear and untested laws regarding contracts and investments.

Back to oil?

According to Bloomberg, while Riyadh continues to tap into its cash, it is increasing efforts to attract more foreign investments. This has been recently the case with neighboring Kuwait, which the Kingdom has asked to pour over $16 billion into the Neom project and others, the newspaper said, citing unnamed individuals informed on the matter.

Despite companies like US-based Air Products agreeing to joint ventures at Neom, Riyadh still bears the responsibility of financing nearly all of the cost, which is approximately half of its current economic output.

“It's effectively still a public sector-led development model," said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC. "At the moment they're using all their pockets of strength for this transformation plan and I think going forward it will still be predominantly a Saudi-led development plan.”

Saudi Arabia's spending will have a global impact, reaching projects it has worldwide, private assets, and even its funds that go to Wall Street and governments.

The emerging situation will force the Kingdom to fill its gaps in finances through oil again.

This realization is leading to a strategy that centralizes spending authority within the Public Investment Fund.

Recently, the Kingdom assigned an additional $164 billion stake in Saudi Aramco to the fund, which is expected to yield a dividend payment of at least $20 billion this year.

The move is basically “raising money from one public pocket at the expense of the other,” said Mohamed Abu Basha, head of research at Cairo-based investment bank EFG Hermes, as quoted by Bloomberg.

It further shows how Saudi Arabia remains reliant on high oil prices to sustain its diversification plans, he added.

Jean-Michel Saliba, an economist at Bank of America Corp. specializing in the Middle East and North Africa, suggested that the Kingdom is likely to support extended production cuts by OPEC+, the oil group it co-leads with Russia. These cuts have been instrumental in maintaining oil prices.

Despite the supply restrictions imposed by the oil output cuts, prices are still below the level of at least $108 per barrel that MBS needs to finance his plans, as stated by Bloomberg Economics.

Cut back on the dream

The PIF currently manages $900 billion worth of assets, yet it had only $15 billion in cash reserves as of September 2023.

The Fund's governor said that the public institution had already deployed almost 30% of its capital for global investments and is now aiming to allocate 20-25% - with the number expected to rise further.

“Our deployment will continue internationally but our focus right now is on the projects that we have in Saudi Arabia,” Yasir al-Rumayyan said in February.

Finance Minister Mohammed al-Jadaan has acknowledged a funding gap and indicated the possibility of issuing additional debt. He has been involved in a committee led by MBS that analyzed Vision 2030's extensive funding requirements and compared them with the Kingdom's projected revenue.

“There was a gap,” he told the Thmanyah’s Socrates podcast. “We called it the Gap Study.”

He pointed out that delaying and shutting down some projects entirely would close this gap.

Sources familiar with the matter informed Bloomberg that additional projects envisioned under Vision 2030 will be halted or significantly reduced in scope.

“Some of them were strategies where we said to ourselves: we actually do not need to spend on this,” al-Jadaan said.