The massive new city project 'Neom City' and various economic development projects in Saudi Arabia have turned red flags. This is due to the ongoing decline in oil prices, which is causing issues for Saudi Arabia's finances that are based on 'oil money.'
According to the Financial Times (FT) on Oct. 31 (local time), oil prices are currently hovering around $70 per BARREL (about 100,000 won), disrupting the fiscal balance of the Saudi government, while state-owned oil company Aramco is also cutting dividends. As a result, it is expected that Saudi Arabia, which operates on massive 'oil dollars,' will need to make budget cuts greater than the originally planned annual expenditure reduction of 3.7%.
At the end of last year, the Saudi government announced that it expected revenue of $315 billion (about 464 trillion won) and expenditure of $342 billion (about 504 trillion won) for 2025, predicting a deficit of about $26 billion (about 38 trillion won). As concerns over the fiscal deficit grow, Saudi Arabia is issuing the largest bonds among emerging market bond issuers this year.
Such national financial issues are likely to adversely affect various economic development projects in Saudi Arabia. Since announcing the 'Vision 2030' project for carbon-neutral economic growth, launched by Crown Prince Mohammed bin Salman in 2017, Saudi Arabia has been proceeding with various projects including Neom City. Most of these are executed by the Saudi Public Investment Fund (PIF), which is based on oil revenues.
Moreover, Saudi Arabia is hosting major international events such as the 2029 Asian Winter Games, the 2030 Expo, and the 2034 World Cup. Preparing for these events requires expenditure on large infrastructure projects such as about 10 stadiums and ski resorts with artificial snow. With some projects already delayed or scaled down, it is highly likely that other projects will face the same fate.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, noted, "If oil prices continue to fall sharply and sustainably, the government will need to further reduce expenditures to contain the fiscal deficit and rising national liabilities" and added, "It is also likely that additional adjustments and recalibrations to off-budget investment plans will be needed."
To secure stable finances, Saudi Arabia has been reducing oil production over the past three years under the leadership of Energy Minister Abdulaziz bin Salman. In 2022, when oil prices remained above $90 per BARREL (about 130,000 won), this strategy seemed to be effective, but oil prices are now declining due to reduced demand and increased production from other oil-producing countries. In March, international oil prices fell to $68 per BARREL (about 100,000 won), which was the lowest in three years.
Furthermore, Saudi Arabia, along with its OPEC+ allies, will begin easing some production cuts starting in April. According to previous reports by Bloomberg, OPEC+ plans to increase production by 138,000 BARREL per day starting April 1, gradually increasing output to 2.2 million BARREL per day by 2026. This decision is interpreted as a judgment that the current production levels are insufficient to cover government expenditures, influenced by pressure from President Donald Trump.
For the time being, Saudi Arabia is expected to maintain a fiscal tightening stance while increasing borrowing funds. The FT reported that Saudi Arabia disclosed a plan to raise $37 billion (about 55 trillion won) to cover the budget deficit and maturing liabilities early this year and has issued bonds totaling $18.4 billion (about 27 trillion won) so far. The sovereign wealth funds and their subsidiaries have also issued bonds exceeding $5 billion (about 7 trillion won). Currently, the debt ratio relative to Saudi Arabia's Gross Domestic Product (GDP) is 29.7%.
Simon Williams, chief economist for Central and Eastern Europe, the Middle East, and Africa at HSBC, stated, "What is more important than the current oil prices is where those prices settle within the cycle and the flow of production." He added, "As Saudi Arabia expanded its development plans, expenditures grew faster, resulting in greater reliance on oil revenues than in the past."