Saudi Arabia is facing its most difficult moment of economic reinvention yet.

Eight years after the now-Crown announced Vision 2030, a blueprint for life after oil, delays in the multi-billion dollar transformation are exposing the financial pressures on the Kingdom.

Saudi Arabia, with a budget deficit of six quarters in a row, has become the largest issuer of international bonds in emerging markets. Saudi Arabia’s decision to reduce oil production in 2023 with other OPEC+ member countries has not increased export revenues significantly.

Check out the main stress points.

Petrodollar Reliance

Oil revenues in the Gulf have fallen by around a third from levels of 2022, when Brent crude was trading at nearly $100 per barrel due to Russia’s invasion. This is affecting the overall stability of the economy as the country continues to spend on Prince Mohammed’s massive projects. These include everything from the city of Neom, to football leagues, tourist resorts and AI investments.

Jean-Michel Saliba is the Middle East and North Africa economist at Bank of America Corp. He said that “the vision is being tested by reality, and adjustments are being made.” It is a sign that the country has matured. I don’t believe it’s an indication that the vision has been derailed.

Goldman Sachs Group Inc. has found that Saudi Arabia’s sovereign-risk rating — a measure which takes into consideration financial and governance metrics — has deteriorated most among emerging markets in the first half year. Morgan Stanley’s June ranking reached the same conclusion. The kingdom was ranked as one of “key laggards.”

Spending Highs

Justin Alexander, analyst at GlobalSource Partners and director of Khalij Economics, said: “My greatest concern is the fact that an increase in spending leads to structural deficits, not temporary or cyclical ones.”

Saudi Arabia’s financial landscape has changed dramatically over the last decade. The International Monetary Fund reports that, while still low by international standards the percentage of government debt in economic output is rising from 1.5% to 31% at the end of this decade.

Alexander said that if the ratio “creeps faster than expected,” the Saudi Arabian government could be scrutinized by the bond market as well as credit rating agencies.

Record Debt

Saudi Arabia and other Saudi entities such as banks, wealth funds and the oil giant Aramco have raised more than $46 billion this year in dollar and euro debt. Saudi Arabia is now the world’s most prolific issuer of international bonds, surpassing China according to Bloomberg data.

Carla Slim is an economist at Standard Chartered Plc. She said that the fiscal deficits would have to be funded both by Eurobonds and domestic issuance.

Jim Krane is a fellow with the Baker Institute for Public Policy at Rice University in Houston. He says that the government can still reduce or delay its investments in so-called “giga-projects” as it has already shown.

Krane said that since there was no organized opposition to the 10-year plan, it would be a good idea to scale back or make a radical U-turn.

Rising Liabilities

Imports are putting pressure on the country’s external finances. IMF predicts that the current-account deficit will shift to a deficit next year after dropping to zero in 2024.

Barclays Plc says that the “unprecedented increase” in foreign liabilities of Saudi lenders is due to their increasing role as hard currency providers to meet domestic financing requirements.

The interest rates that Saudi banks charge each other for loans indicate that local liquidity is still stretched. This year, the Saudi Interbank Offer Rate for three months has reached a new record average of over 6%.

IMF estimates that the Saudi government requires Brent to reach nearly $100 per barrel in order to balance its budget. This is about $15 higher than the current level. Bloomberg Economics estimates that the break-even point is $109 per barrel once the Public Investment Fund, the sovereign wealth fund, has been taken into consideration.

Foreign Investment

The crown prince has had a difficult time achieving his goals because foreign direct investment outside of the oil and natural gas industry is slow.

The government hopes to attract $100 billion in FDI per year by 2030. This is roughly three times more than what it has ever attracted. According to data from the government, net inflows were around $2.5 billion for the first quarter. This is a fraction of what this year’s target was.

According to the United Nations Conference on Trade and Development, FDI in 2023 was only $12.3 billion, which is 60% less than the United Arab Emirates. This country has a smaller economy.

In part because of this, the non-oil sector growth — an important gauge for the government — slowed to its slowest pace in the first quarter since the coronavirus epidemic. The IMF has recently revised its forecast of Saudi Arabia’s economic growth to 2.6%. It was expecting 4% in late 2023.

Officials anticipate fiscal expenditures of around $333 billion for this year. This would be a decrease from 2023 and highlights the newfound caution of the government.

The kingdom’s budget is still in the red, and will continue to be so for several years. This means that domestic institutions such as the PIF or Armaco are responsible for the majority of these mega-projects.

Bloomberg Economics: What they Say

Saudi Arabia’s unwavering dependence on oil remains the biggest obstacle. The kingdom tried to raise prices by joining OPEC+ but the supply from other countries hampered that effort. The authorities need to spend enough to keep the economy running and the people happy, while maintaining sufficient restraint to limit the budget deficit.”

Ziad Daoud is the chief economist for emerging markets. Click here to read more.

The crown prince will not give up on his goals, no matter how many obstacles he faces.

Karen Young, senior researcher at Columbia University’s Center on Global Energy Policy, said that “the transformation has now been institutionalized.” The process of diversification has already begun, and there is little chance that it will reverse course.