A month ago, Saudi Arabia raised $3 billion through a new bond sale through its national oil major Aramco – the second for the kingdom since July – in response to falling oil prices. This latest bond brought total Saudi 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 editors, the Saudi Arabia Private Investment Fund has issued a total of $50 billion in bonds this year, both corporate and sovereign debt. It is also likely to issue more debt securities by the end of the year, as it becomes one of the largest players in the bond market internationally.

All this is due to the Vision 2030 program. Imagined by Crown Prince Mohammed, Vision 2030 aims to diversify the Saudi economy away from oil. Ironically, for this vision to come to fruition, the kingdom relied on oil revenues. This is a similar situation to that of the United Kingdom, which wants to finance its own transition away from oil and gas with taxes collected from oil and gas operators.

Vision 2030 had sufficient funds when oil prices were high. Today, as prices have become chronically depressed due to algorithmic trading and concern over growing Chinese demand, the Saudi government is experiencing a liquidity shortage, and the debt market is the most quickly to fill this shortage.

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According to the Saudi National Debt Management Center, the 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 external debt. Compared to the American debt, this is nothing. But compared to 2019 debt levels, this is a palpable increase: in 2019, Saudi debt stood at $180.8 billion.

It appears that Saudi leaders are determined to make the Vision 2030 plan work, even though it has had to undergo some adjustments, and some projects have been canceled because they did not make economic sense. In 2018, for example, the Saudis abandoned a $200 billion solar power project that Riyadh was to build jointly with Japanese company SoftBank. The project was supposed to be the largest ever, but that did not guarantee profitability, hence the change of plan.

Neom, it seems, remains very much in the game. The $500 billion smart city and low-carbon energy ecosystem is the flagship project of Vision 2030. Alas, construction prices for such projects have not fallen relative to crude oil prices, thereby increasing the Saudis’ borrowing appetite. The budget deficit created by low oil prices must also be closed.

Earlier this year, the International Monetary Fund issued a warning to decision-makers in Riyadh. He said the kingdom needed oil prices above $96 a barrel to break even, given its fiscal spending. It seems unlikely that oil will reach even $90, let alone $96 per barrel in the foreseeable future. This means that Saudi Arabia will indeed continue to borrow next year while continuing to diversify. Only now will this diversification be financed by loans rather than oil revenues – until prices begin to rise to more acceptable levels.

Some argue that prices will not rise much no matter what Saudi Arabia does in terms of production. Indeed, the self-imposed production cut of one million barrels per day has not really had the desired effect on prices due to the same focus on Chinese demand among traders. Global supply would need to tighten further for prices to respond.

The problem is that Saudi Arabia is losing market share due to its control of production. This is a real dilemma: going into debt to finance Vision 2030 is not the optimal option, and neither is cutting the program altogether after having already spent so much money. Perhaps there is a middle ground that the Saudis could adopt without drowning in debt and remaining tied to oil revenues for public spending.

By Irina Slav for Oilprice.com

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