Effects of coronavirus and oil collapse could halt some of kingdom’s biggest projects

When Crown Prince Mohammed bin Salman unveiled his bold economic reform plan, 2020 was supposed to be the year when a first round of key targets were to be met, including reducing unemployment, increasing non-oil revenue and creating private sector jobs.
Now it threatens to be the year that slams the brakes on his ambitions as the twin shocks of coronavirus and collapsing oil prices force the government to radically reconsider its priorities.
Riyadh has already dipped into its foreign reserves and the finance ministry, which previously announced a 5 per cent cut in government spending, warned this month that the kingdom was facing an “extreme crisis” and would need to take “strict and extreme” measures.
With the spectre of deeper spending cuts looming, some of Prince Mohammed’s flagship Vision 2030 projects to reduce the kingdom’s dependency on oil — such as a $500bn futuristic city called Neom, a high-end Red Sea tourism development and a vast entertainment and sports complex — risk becoming victims of the belt-tightening.
“The final numbers have not been agreed, but they [the megaprojects] are being looked at. It’s a question of spreading the investment out over a longer period,” said one Saudi analyst familiar with the leadership’s thinking. “Capital expenditure will go down dramatically.”
Mohammed al-Jadaan, finance minister, told Saudi television network Al Arabiya last week that the government was considering delaying “some projects” that are part of the 2030 plan.
His warnings about the severity of the crisis represented a marked shift in tone. One businessman, who has already furloughed staff and is finding it tougher to secure payments from state-affiliated entities, said it “sent shivers down a lot of people’s spines”.
Two days later, the Public Investment Fund, the sovereign wealth fund charged with spearheading the megaprojects, including Neom, suggested work on its plans would continue.
“PIF’s three gigaprojects symbolise the holistic shift taking place. Each will become a focal point for investment in the region and serve to support future growth,” the fund said on Twitter.
The episode was indicative of the delicate balance facing policymakers as they seek to protect foreign reserves and ease the economic pain on Saudi businesses and workers.
One person familiar with policymakers’ conversations in Riyadh said there were two camps: one that felt there needed to be swingeing cuts to keep the ballooning fiscal deficit in check and preserve foreign reserves, and another that believes the belt-tightening should be accompanied by some countercyclical spending to offer a lifeline to the private sector.
A government adviser said ministries were considering spending cuts that range from capital expenditure, consultancy contracts and employee benefits. The public sector is the main employer for Saudis and the state’s wage bill accounts for about half the budget, while capital expenditure accounts for 17 per cent. But any reductions to salary packages would be politically sensitive — three years ago the government reversed cuts to civil servant benefits after a backlash.
“They are working on different scenarios and projections at the moment,” the adviser said. “The debate rages on those fronts.”
Said al-Shaikh, an economist and member of the Shura Council, an advisory body that serves as a quasi-parliament, said he expected another SR100bn ($26bn) in cuts, which would mean the overall decline in spending would represent about 15 per cent of the planned 2020 budget. He also said cuts would probably include some Vision 2030 programmes and mega-projects.
“This will be either through extending the execution period time and thus lessening annual allocations or by reprioritising, as such delaying the commencement of the less priority projects,” Mr Shaikh said.
Prince Mohammed, the country’s de facto leader, has not spoken publicly about the crisis. In 2017 he said he would take austerity measures if oil prices went below $30 a barrel, claiming his reforms would make the kingdom more resilient to shocks.
But government spending fuelled by petrodollars remains the prime driver of economic activity. New sectors Riyadh was betting on, including entertainment and tourism, have been frozen as domestic and global travel have been curtailed.
Farouk Soussa, chief Middle East economist at Goldman Sachs, estimated that Riyadh would need to rein in spending by about 15 per cent of gross domestic product to manage the crisis and preserve its reserves if oil prices remain at current levels indefinitely.
When the finance ministry launched a $32bn rescue package to support businesses in March, Mr Jadaan said the government had raised its debt ceiling from 30 per cent of GDP to 50 per cent and would borrow rather than tap the reserves. Then last month, he said the government would need to borrow again — an additional $26bn — and could draw down up to $32bn of its reserves.
Economists predict the Saudi riyal’s peg to the dollar would face pressure if foreign reserves dropped to about $300bn, the point where it falls below the level needed to cover the kingdom’s outstanding riyal obligations. After the last oil slump in 2015, the kingdom’s reserves plummeted from $726bn to about $500bn. In March, they fell $24bn to about $470bn, the largest monthly decline on record.
“If we start seeing reserves drop very rapidly towards $300bn then it starts to become a problem. In a world where oil prices go to $40 then $65 a barrel next year then we are not going to go near the $300bn threshold,” Mr Soussa said. “If oil prices stay at $30 then you could get to that threshold in the next year.”
Riyadh insists it will maintain the peg. Mr Shaikh estimated that with additional borrowing and spending cuts, the kingdom’s foreign exchange reserves would be kept at about $400bn. 
Some Saudi businessmen say that while they are bracing themselves for a recession, they are still hopeful of a recovery in 2021. “This year will be difficult, but next year should be better with the oil price hopefully going towards $40-$60,” said a Saudi executive.
However, the crown prince faces “one mammoth challenge around the unsustainability of the current economic model”, said Ayham Kamel, head of the Middle East research group at the risk consultancy, Eurasia Group.
“Prince Mohammed has been able to mobilise an effective campaign to contain the impact of Covid-19 and there is probably a short-term popularity boost associated with that,” Mr Kamel said. “However, a sharp rise in unemployment presents risks to the entire project of building new opportunities for citizens that has attracted support from most Saudis.”