- Saudi Arabia’s domestic financial system is increasingly strained, pushing the Kingdom towards international debt markets.
- The Kingdom’s ambitious mega-projects, including NEOM, are driving unprecedented borrowing needs.
- Saudi Arabia’s reliance on international funding is now structural, marking a significant shift in its economic strategy.
In a move that underscores a significant shift in its economic strategy, Saudi Arabia is increasingly turning to international debt markets to fund its ambitious domestic projects. The Kingdom’s financial system, once robust enough to meet local borrowing needs, is now showing signs of strain. This development is not merely a temporary adjustment but a structural change in how Saudi Arabia finances its growth, particularly its mega-projects like the futuristic city of NEOM.
The financial demands of these projects are immense. NEOM alone is projected to cost a staggering $8.8 trillion, a figure that dwarfs Saudi Arabia’s annual budget multiple times over. This has led to a liquidity squeeze within the Kingdom, as credit growth has consistently outpaced deposit growth. The domestic financial system, traditionally reliant on local bank loans and sukuks, is now unable to keep pace with the burgeoning demand for capital.
Compounding these challenges are deliberate oil production cuts and weaker oil prices, which have significantly reduced Saudi oil revenues. From SAR 857 billion in 2022, oil revenues are projected to fall to SAR 608 billion by 2025. This decline has shifted the national budget from a surplus of 2.2% of GDP to a projected deficit of 4% over the same period, according to the International Monetary Fund. The Kingdom’s strategic pivot away from oil dependency, while necessary, is proving costly in the short term.
As a result, Saudi Arabia has been compelled to seek external funding. The Kingdom’s sovereign and quasi-sovereign issuances now account for a substantial portion of the emerging market sovereign bond index, making it the largest issuer in that index. Similarly, Saudi corporate issuances have surged, positioning the Kingdom as a major player in the corporate bond market as well.
This reliance on international debt markets is not a stopgap measure but a new normal for Saudi Arabia’s financial strategy. The Kingdom’s banks have increasingly turned to wholesale funding to sustain credit growth, with the loans-to-deposits ratio deteriorating from 86% in 2019 to 110% by the end of 2024. This indicates a systemic dependency on external funding sources to maintain economic momentum.
The implications of this shift are manifold. On the one hand, Saudi Arabia’s high credit rating and the global appetite for its bonds provide a cushion against the immediate financial pressures. However, the increased reliance on international investors introduces new risks. The abundance of Saudi debt in the market, coupled with the price sensitivity of foreign investors, could lead to volatility in bond performance. The once-reliable model of tight spreads and strong performance in the sukuk market is now under threat.
Moreover, this strategic shift raises questions about the sustainability of Saudi Arabia’s economic diversification efforts. While the Kingdom’s Vision 2030 aims to reduce oil dependency and foster new industries, the financial underpinnings of this vision are increasingly reliant on external capital. This could limit Saudi Arabia’s economic sovereignty and expose it to the vagaries of international market conditions.
In conclusion, Saudi Arabia’s pivot towards international debt markets marks a significant evolution in its economic strategy. While this move provides the necessary capital to fund its ambitious projects, it also introduces new challenges and risks. As the Kingdom navigates this complex financial landscape, its ability to balance domestic priorities with international dependencies will be crucial in determining the success of its long-term economic transformation.