Saudi Arabia has embarked on a rapid and ambitious social and economic transformation program under Vision 2030. S&P Global Ratings expects that growing debt issuance to finance Vision 2030 projects could pressure the sovereign's fiscal metrics. In our base case, however, we expect the government's net asset position will deteriorate but remain strong, alongside prudent fiscal policies.

Among the program's key goals are the diversification of the hydrocarbon-reliant economy and jobs creation. Some efforts are already delivering outcomes, particularly in tourism and women's labor force participation.

Vision 2030 also encompasses large-scale "mega" and "giga" projects, such as the futuristic city of Neom, with sizable investment requirements. MEED, formerly known as the Middle East Economic Digest, estimated the value of all Vision 2030 infrastructure projects at around $1 trillion--about 90% of 2024 GDP (to be deployed over several years). These projects aim to deliver dividends in the form of economic growth, employment, and expansion of the private sector, as well as supporting social liberalization and the development of capital markets.

However, the ramp-up in fiscal deficits and debt could weaken the government's balance sheet far sooner than returns on investment will accrue. Much will depend on the roles that foreign investment, the private sector, and capital markets will play in financing Vision 2030.

We analyzed four scenarios for the central government's and sovereign wealth fund Public Investment Fund's (PIF's) debt issuances through 2030: our base case and three alternative scenarios of incrementally higher debt issuance. These alternative scenarios' sharper deterioration in net general government assets could pressure the sovereign credit rating, all else being equal. However, strong per capita real GDP growth outcomes and an improving monetary and institutional framework could offset pressure on the sovereign rating.

The PIF Is Vision 2030's Catalyst

The PIF is the main catalyst for Vision 2030, responsible for investing in domestic mega and giga projects, sports and entertainment ventures, and international investments. See the table below for key Vision 2030 projects and their estimated costs (only for indicative purposes, since they could change).

To support Vision 2030, the PIF continues to target $40 billion in investments in the local economy per year. It held $925 billion in assets under management as of Dec. 31, 2023, which it aims to increase to about $1 trillion by 2025, with debt issuances supporting this expansion. Thus far in 2024, the PIF raised Eurobonds of $5 billion in January and sukuk of $2 billion in February.

We expect the central government to support the PIF and Vision 2030 in several ways, including funding basic infrastructure for the mega and giga project sites. In its medium-term budget statement published in October 2023, the government announced it will increase strategic spending on key projects in a push to realize Vision 2030.

As a result, the IMF estimates Saudi Arabia's fiscal break-even price will rise to an estimated $96 per barrel (/bbl) in 2024, compared with $80/bbl on average over 2000-2020. The country has the second-highest fiscal break-even point in the Gulf Cooperation Council, after Bahrain.

Our fiscal forecasts are broadly in line with official deficit targets of 2% of GDP on average over 2024-2026. We project capital expenditure at about 15% of spending.

External Debt Could Form The Majority Of Government Funding

We expect the government and PIF will seek to increase external funding and diversify the investor base to mitigate the impact on domestic banks' liquidity and allow lending growth for other government-related and corporate entities. We project external debt will be 60%-70% of total government and PIF issuances.

That said, we expect domestic banks will still play a key role in funding the public and corporate sectors, given the large size of projects. Domestic banks will likely see a shift from mortgage lending toward corporate lending and Vision 2030 project funding.

However, the banking system alone cannot handle all the financing needs related to Vision 2030. As of Dec. 31, 2023, our calculation of banks' loan-to-deposit ratio reached 104%. We expect banks will use alternative strategies, including raising additional external funding, to meet credit demand (see "Your Three Minutes In Banking: Saudi Banks May Turn To Alternative Funding Options," April 30, 2024).

In 2023, Saudi banks injected almost US$55 billion in the form of investments and financing in the public and corporate sectors (excluding financing to the retail sector). In 2024, we expect banks will grow their lending book by 8%-9%. Under the assumption that 70% of that lending is for corporates, banks can inject $40 billion-$44 billion in financing. A portion of that could be used in Vision 2030.

These numbers exclude investments in government bonds, which are more difficult to forecast. We expect deposits to increase by around 8% and external debt issuance of around $10 billion in 2024 to finance expected lending growth.

Four Scenarios For Government Fiscal And Debt Metrics

For this scenario analysis, we extended our existing sovereign forecasts (through 2027) by another three years through 2030, using broadly the same annual trends. Alternative scenarios 1-3 show incrementally higher government and PIF debt issuance over 2024-20230, with all else remaining equal.

Chart 1

In our base case, we expect that despite a weakening net debt position, the government will maintain its strong balance sheet and prudent fiscal policies. We forecast Saudi Arabia's gross government debt to GDP will increase to 26% by 2027, relative to 14% in 2017. For comparison, we expect gross government debt to GDP will reach 79% on average for G20 sovereigns (excluding Russia) in 2027.

We also expect that Saudi Arabia will maintain a net asset position (gross government debt after adjusting for government liquid assets) of 47% of GDP in 2027, compared with a net debtor position of 63% for the G20 countries over the same period.

However, alternative scenarios' sharper deterioration in net general government assets could pressure the sovereign credit rating. This could be the case if external sources of investment fall short and the government and PIF continue project implementation by taking on a larger share of the funding burden. Another downside scenario would be a sharp fall in oil prices and production volumes, reducing nominal GDP and weakening debt metrics.

Some of the key assumptions in our scenarios are as follows:

• All forecasts are based on S&P Global Ratings' Brent oil price assumptions of $85/bbl in 2024 and $80/bbl over the medium term (see "S&P Global Ratings Report Announces WTI And Brent Price Assumptions Change For 2025 And Beyond; Anticipated Oversupply," March 12, 2024). Upward or downward changes in oil prices could lead to large differences in nominal GDP and funding requirements.
• Our scenario analysis is based on total central government and PIF debt issued over 2024-2030. For the central government, debt issuances include fiscal purposes beyond Vision 2030. We assume capital expenditure in the government budget will be deployed toward Vision 2030 execution--this makes up 15% of total government spending in our base case and above 50% in alternative scenario 3.
• PIF funding makes up slightly less than 30% of total debt issuance in our base case. This increases to 55% in alternative scenario 3, where we expect the PIF to take on more of the financing burden for Vision 2030.
• Nominal GDP forecasts remain the same across all scenarios to allow comparability. We also assume that in the alternative scenarios, higher public spending largely replaces weaker inflows of private and foreign investment. However, increased public investment and debt issuances could boost growth outcomes, mitigating the growth in net government debt through the denominator effect.
• We focus on debt issuances rather than asset drawdowns because authorities have stated they will prioritize preservation of assets. We calculated general government liquid assets at about 80% of GDP at end-2023.
• We assume the effective cost of debt will remain stable across the different scenarios. However, interest costs would likely be higher if government and PIF debt issuances were to rise substantially.

Effects on sovereign risk indicators

In the alternative scenarios, there could be material downside risk to the sovereign rating from the fiscal flexibility and performance score, which relies on the change in net government debt to GDP (see chart 2).

Chart 2

We see less risk to our debt burden assessment, given the government's comfortable amount of liquid assets, even in the alternative scenarios. This could change if interest costs were to significantly increase on the back of higher debt issuances.

Chart 3

Chart 4

A Benign Debt Trajectory Despite High Project Spending

There are several reasons why our base case envisions a relatively benign government debt trajectory despite the high planned project spending.

Shifting project timelines

Authorities have acknowledged that several Vision 2030 projects will continue implementation beyond 2030. In addition, recent news reports indicated that Neom--particularly the Line project, initially supposed to be a 170-kilometer-long city built for 1.5 million residents--would be scaled down. This implies that funding requirements will be phased over a longer period, allowing a more organic increase in economic activity and foreign investment.

Role of other public and private investment

While the PIF and government will continue debt-financed investment for Vision 2030, other government-related entities (including PIF portfolio companies), private-sector participants, and foreign direct investment (FDI) will play important roles in implementation, in our view. For example, Neom is reportedly looking to issue up to Saudi riyal (SAR) 5 billion (US$1.3 billion) this year through sukuk on its own balance sheet.

Future FDI inflows could offer upside on the back of growing investment opportunities and government efforts to improve regulatory and business conditions. These efforts include the opening of free economic zones and a 30-year tax break for multinational companies opening regional headquarters in the country. FDI inflows have averaged only around 2% of GDP over the past three years. The government's target under Vision 2030 is to increase annual FDI inflows to 5.7% of GDP.

Development of capital markets

Saudi capital markets will likely be key to powering government-related and corporate investments as companies move away from reliance on the banking sector and direct or indirect government funding (see "Saudi Capital Markets Will Be Key To Powering Corporate Investments," Nov. 29, 2022). The Saudi stock exchange Tadawul is the largest equities market in the Middle East and North Africa by market capitalization and trading volume. The 2019 IPO of oil and gas company Saudi Aramco was a major step, and several Saudi entities have since tapped the equities market.

Tadawul is focused on diversifying the industries represented on the stock exchange in line with Financial Sector Development Program directives. It's working with the Capital Market Authority of Saudi Arabia to simplify processes and entice local and international issuers by improving market functionality and efficiency, expanding access, strengthening corporate governance, and increasing transparency. This should bolster the attractiveness of debt and equity transactions on capital markets and enable a more diverse funding base for Vision 2030 projects.

Additional government tools

The government has other assets that it could draw on to support Vision 2030 and avoid an expanding debt bubble. These include an 82% stake in Saudi Aramco, which has a market capitalization above $7 trillion. The government has thus far transferred a total 16% stake in Saudi Aramco to the PIF and its subsidiaries, which has substantially added to the PIF's asset base, leading to dividend returns that it can deploy toward Vision 2030 projects. The government could choose to sell further stakes in Aramco through an IPO to raise additional financing.

Moreover, on top of government liquid assets of around 80% of GDP, the country held foreign exchange reserves of US$455 billion (around 40% of GDP) at central bank SAMA as of end-March 2024. However, we expect SAMA will maintain high foreign exchange reserves to meet its balance-of-payment requirements, ensure stability of the currency peg to the U.S. dollar in case of an external shock such as a sharp drop in oil prices, and pursue its foreign policy goals--for example, providing aid to regional countries.

Related Research

• Property Shortage And Government Push Will Fuel Growth For Saudi Developers, May 6, 2024
• Your Three Minutes In Saudi Vision 2030: Credit Implications For Banks And Corporates, May 2, 2024
• Your Three Minutes In Banking: Saudi Banks May Turn To Alternative Funding Options, April 30, 2024
• Ratings On Saudi Arabia Affirmed At 'A/A-1'; Outlook Stable, March 15, 2024