Mohammed Bin Salman's 2030 Vision Hits Economic Roadblock: Saudi Arabia Contemplates Unprecedented Borrowing, Weighs Aramco Stake Sale

The ambitious development projects in Saudi Arabia are straining the country’s finances, leading to unprecedented borrowing and potential stock sales in its crown jewel, Saudi Aramco.

What Happened: Saudi Arabia has been embarking on a series of high-profile projects, including a $500 billion city and a $48 billion property development. These initiatives, led by the country’s sovereign wealth fund, have significantly depleted the fund’s cash reserves, reported The Wall Street Journal.

To continue funding these projects, the kingdom has resorted to borrowing, a strategy it had previously avoided. Additionally, it is planning to sell more shares in Saudi Aramco, the state-owned oil company, according to the report.

The country’s Crown Prince, Mohammed bin Salman, has been driving the Vision 2030 economic development plan, which aims to transform Saudi Arabia into a diverse economic powerhouse. The plan includes initiatives such as integrating women into the workforce and a more active foreign policy.

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"It's mind-boggling the amount of stuff that's trying to be done here," said Tim Callen, a visiting fellow at the Arab Gulf States Institute think tank in Washington. He predicts that the government might have to inject an additional $270 billion into (Public Investment Fund) PIF by 2030. "It will involve taking more risk" fiscally, he said, either by adding debt or lowering reserves that keep the Saudi riyal currency pegged to the dollar.

However, the country’s oil revenues have plateaued, and the International Monetary Fund (IMF) estimates that oil prices would need to be above $86 a barrel in 2023 and $80 a barrel in 2024 to balance the government’s budget. Despite significant spending, Saudi Arabia experienced an economic contraction in 2023.

In the current year, Saudi Arabia anticipates a budget shortfall of $21 billion, constituting approximately 2% of the nation’s gross domestic product (GDP). Riyadh foresees running modest annual deficits until 2026, diverging from earlier predictions of surpluses.

To bridge the financial gap, Saudi Arabia conducted two major debt sales at the beginning of the year. The country’s debt is expected to reach 26% of its GDP this year, a significant increase from a decade ago.

To bridge the shortfall, Saudi Arabia commenced the year with two substantial debt issuances. In early January, the government surprised investors with a $12 billion bond sale, surpassing its earlier projection of borrowing approximately $9 billion from global debt markets for the entire 2024. Shortly after, PIF conducted a separate bond offering, raising $5 billion.

Why It Matters: The financial strain caused by Saudi Arabia’s ambitious projects is a significant development. It comes at a time when the country is making strategic moves to secure its position in the global arena. For instance, Saudi Arabia is reportedly seeking a defense pact with the U.S. and is willing to accept a political commitment from Israel for the establishment of a Palestinian state.

Moreover, the country is taking steps to diversify its economy and attract tourism and business, such as opening its first-ever alcohol store in Riyadh. Additionally, Saudi Arabia is positioning itself as a “super region” for natural resources, attracting the attention of global powerhouses like the U.S. and China, who are racing for the Kingdom’s mineral resources.

These developments indicate that Saudi Arabia is making significant strides to transform its economy and global standing. However, the financial strain caused by the ambitious projects could impact the country’s ability to sustain and expand these initiatives in the long run.

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Mohammed bin Salman. Image Via Shutterstock