Analysis
Can Saudi Arabia afford giga-projects with oil prices under $75 per barrel?
Riyadh could soon run a current account deficit as oil revenue declines amid huge spending commitments toward ambitious Vision 2030 projects. Saudi-led OPEC has also deferred an output increase plan to allow more time to reach desired oil prices.
DUBAI/WASHINGTON — Saudi Arabia is set to face fresh challenges in financing its giga-projects as oil prices remain below its desired levels to meet spending commitments, particularly those aligned with its Vision 2030 policy.
The International Monetary Fund said in its Article IV review on Wednesday that Saudi Arabia is set to see a current account deficit over the next five years as low oil prices continue to bite into the country's economy.
The IMF said in its review that Riyadh's current account surplus "narrowed significantly to 3.2 percent of GDP in 2023" due to lower oil exports and stronger investment-related imports.
Oil prices fell to a 14-month low on Wednesday, prompting OPEC+, the group that Riyadh heads with Moscow, to continue to keep its current production curbs in place for another two months.
In June the group suggested unwinding some of the cuts from October onward. The plan is now postponed as Saudi Arabia, the world's largest exporter of oil, grapples with persistent low oil prices, which are below the level Riyadh needs to balance its books and meet its multibillion-dollar spending commitments.
The break-even price for oil
According to the IMF, Saudi Arabia would need oil at $82.5/b in 2024 to balance its budget. The figure is based on an oil production assumption of nine million barrels per day for 2024. Benchmark Brent, which is used to price and sell two-thirds of the world's seaborne crude, settled at $71.28/b on Friday. Saudi Arabia, which is widely expected to reverse its production cuts and boost output to around 9.7 million barrels per day in 2025, is likely to see a lower break-even price for oil at $77.8/b.
London-based Capital Economics estimates that Saudi Arabia's break-even price of oil is currently around $75-80/b, which is "a significant increase" compared with a few years ago, according to its Middle East economist James Swanston.
The economic research group expects the break-even price for oil to drop to below $70/b in 2025-26.
Declining oil revenue
Saudi oil revenue has also fallen as sustained cuts including one million barrels per day of voluntary curbs by Riyadh continue to bite.
Saudi Arabia's oil revenue is expected to decline nearly 3% to 733 billion Saudi riyals [$195 billion] in 2024 from 755 billion riyals in 2023, according to the IMF. Total revenue is not expected to change much as the share of non-oil exports rises. Saudi Arabia earned 1,212 billion riyals in 2023, with total revenue expected to stay around the same at an estimated 1,214 billion riyals this year.
The country's expenditure is expected to rise 4% from 1,293 billion riyals in 2023 to 1,351 billion riyals in 2024. The IMF projects a steady rise in spending until 2029 as the kingdom accelerates projects close to the Vision 2030 deadline.
Saudi Arabia would like to defend prices around the $80-85/b mark, Swanston said. "For example, the 2024 budget was based upon an oil price of $86/b," he added.
Financing conundrum
A big concern for the kingdom is the ability to continue to spend on accelerating projects designed for tourism, industry and energy transition before the end of this decade as well as ahead of the country's net-zero deadline of 2060.
"The bigger question is whether these projects can be financed over the longer term, particularly if oil prices stay at current levels rather than return to the $80-85 a barrel range," Tim Callen, a former head of the IMF mission to Saudi Arabia and visiting fellow at the Washington-based Arab Gulf States Institute, said.
"Lower oil revenues will definitely make financing more challenging," he added.
Among the big projects Saudi Arabia looks to bankroll are the $500 billion NEOM sustainable city, the $90 billion Roshn housing project, the $20 billion Diriyah Gate cultural development, the $16 billion luxury tourism Red Sea Global and $8 billion to be spent on the tourism hub of Qiddiya. All these projects have a deadline between 2027 and 2035.
Resizing ambition
Riyadh has since the beginning of the year resized some of its existing projects. State-run Saudi Aramco rolled back a plan to add one million barrels per day of oil production capacity by 2027. The multibillion-dollar project no longer made sense amid Saudi Arabia's sustained oil production restriction policy and diversification to greener projects. The government also said it would downscale The Line project at NEOM, which is now set to be home to 300,000 people compared with earlier plans for 1.5 million.
"The central government itself may not be able to afford the commitments it has pledged before to invest," Swanston said.
"Previously the finance ministry has suggested that capital expenditure would be cut," he added.
Saudi Arabia has also stepped up efforts to attract foreign investors in recent weeks, updating an investment law to provide an equal platform for both domestic and international investors in its economy.
