A month ago, Saudi Arabia raised $3 billion from a fresh bond sale via its state oil major Aramco—the second for the kingdom since July—in response to lower oil prices. That latest bond has pushed Saudi’s total bond issuance this year to some $50 billion; Vision 2030 is a costly diversification project.
Bloomberg reported on the total size of Saudi Arabia’s exposure to bond markets via its sovereign wealth fund this week. According to data compiled by Bloomberg writers, the Private Investment Fund of Saudi Arabia had issued a total of $50 billion in bonds this year, in both corporate and sovereign debt. It is also likely to issue more debt by the end of the year as it becomes one of the largest bond market players internationally.
It’s all because of the Vision 2030 program. A brainchild of Crown Prince Mohammed, Vision 2030 aims to diversify the Saudi economy away from oil. Ironically, however, for that vision to materialize, the kingdom relied on oil revenues. It’s a situation similar to that of the UK, which wants to fund its own transition away from oil and gas with the taxes collected from oil and gas operators.
Vision 2030 had plenty of funds when oil prices were high. Now, when prices have become chronically depressed due to algorithmic trading and a preoccupation with Chinese demand growth, the Saudi government is experiencing a shortage of cash, and the debt market is the quickest route to covering that shortage.
According to Saudi Arabia’s National Debt Management Center, the kingdom’s total debt stood at some $308.7 billion at the end of September. Of this total, $183.7 billion was domestic debt, and the remaining $125 billion was foreign debt. Compared to U.S. debt, this is nothing. But compared to 2019 debt levels, it is a palpable increase: in 2019, Saudi debt stood at $180.8 billion.
It appears that the Saudi leadership is determined to make the Vision 2030 plan work even if it had to endure certain adjustments, and some projects got canceled because they did not make economic sense. Back in 2018, for instance, the Saudis scrapped a $200-billion solar power project that Riyadh was set to build jointly with Japan’s SoftBank. The project was supposed to be the biggest ever, but that did not guarantee its profitability, hence the change of plans.
Neom, it seems, remains very much in the game. The $500-billion smart city and low-carbon energy ecosystem is the flagship project of the Vision 2030. Alas, prices for building such projects have not come down along with crude oil benchmarks, raising Saudi borrowing appetite. The budget deficit gap that low oil prices opened also needs plugging.
Earlier in the year, the International Monetary Fund issued a warning to the decision-makers in Riyadh. It said the kingdom needed oil prices at a level above $96 per barrel in order to break even, given its budget spending. Oil looks quite unlikely to get to even $90, let alone $96 a barrel in the observable future. That means that Saudi Arabia will indeed continue to borrow next year as well as it pursues its diversification. Only now this diversification would be funded with loans rather than oil revenues—until prices start recovering to more palatable levels.
Some argue that prices are not going to go much higher whatever Saudi Arabia does in terms of production. Indeed, the 1-million-bpd self-imposed output reduction has not really had the desirable effect on prices because of that same China demand focus among traders. Global supply would need to tighten further for prices to react.
The problem with this is that Saudi is losing market share from its output control. It is a serious conundrum: sinking into debt to fund Vision 2030 is not the optimal option, and neither is axing the program entirely after spending so much on it already. Perhaps there is a middle ground that the Saudis could pursue without drowning in debt and remaining tied to oil revenues for public spending.
By Irina Slav for Oilprice.com