Employees at Saudi state-supported firms have experienced unexpected budget reductions in recent times, with the onset of these austerity measures traceable to the first quarter of 2024. The impact has been widespread, touching various industries including the media and the nation’s ambitious giga projects. This led to a significant slash in departmental budgets, job layoffs, and a concerted effort to economize, resulting in a tense and unpredictable work environment.
The previous comfort associated with seemingly boundless financial resources, evidenced by grandiose events and launches, has given way to apprehension about future prospects.
This anxiety intensified with the announcement of cutbacks in spending on large-scale development projects. For instance, the construction of Neom’s futuristic desert city, The Line, which was originally envisioned as a 170-kilometer long habitat for 1.5 million people, has been scaled down. Officials have now decided to focus on the ‘first module,’ limiting the initial development to just 2.4 kilometers and aiming to accommodate 300,000 residents by 2030.
Government spending cuts are best understood as expenditure rationalization, improved decision-making and cost-benefit analysis of projects, including mega projects, in the light of achievements since the launch of Vision 2030,
explained Nasser Saidi, the founder of Nasser Saidi & Associates and a former Lebanese economy and trade minister. The Saudi economy remains in a transformation phase with increased policy emphasis on growing the non-oil sector for economic diversification and greater private sector participation,
he added.
Saudi analysts are aligned in their views. The strategy of the Saudi economy is based on the portfolio approach: The Saudis will be reviewing projects on a continuous basis, and projects that have shown more promise will get more money,
noted Ali Shihabi, a Saudi analyst and commentator.
Mohammed bin Abdullah Al-Jadaan, the Saudi Minister of Finance, commented on the abrupt changes in expenditures at a World Economic Forum event held in Riyadh in April 2024. There are challenges … we don’t have ego. … We’ll change course, we’ll adjust, we’ll extend some of the projects, we’ll downscale some projects, we’ll accelerate some projects,
he declared.
Shihabi highlights a reality, Ultimately, the commitments made under Vision 2030 are more than the resources available. It was a very ambitious plan put together, and the government never expected more than 40-50% of it to be achieved.
A hunt for foreign money
In pursuit of the grand objectives of MBS’s Vision 2030, which include stimulating economic growth, trimming the fiscal deficit, diversifying the economy, and reducing oil dependency, Saudi Arabia is actively seeking foreign investment.
However, Foreign Direct Investment (FDI) in the kingdom has consistently fallen short. GaStat reported that FDI inflows amounted to $19 billion in 2023, below the $22 billion target for the year set by the Saudi National Investment Strategy. Moreover, these figures represent a decline from the $27 billion received in 2021 and $33 billion in 2022.
With global interest rates projected to remain high, at an average of around 4% over the next two years, investors are expected to proceed with caution. In a recent move to attract FDI, Saudi Arabia has initiated the sale of shares in state oil giant Aramco, aiming to raise $11.2 billion from its secondary public offering. According to reports, the sale attracted substantial foreign interest, with over half of the stock sold to international investors.
The kingdom is also committed to hosting major events in the future, such as the Asian Winter Games in 2029, the Asia Cup 2027, Expo 2030 in Riyadh, and potentially the FIFA World Cup 2034. These events may not yield direct financial returns but contribute to enhancing Saudi Arabia’s global profile.
Diversification paying off
The recent cost-cutting initiatives in Saudi sectors are largely seen as a ‘reconsidering of priorities,’ in line with Crown Prince Mohammed bin Salman’s comprehensive Vision 2030 blueprint. The diversification strategy appears to be bearing fruit, with the kingdom making strides in economic activity, trade, and government revenue sources beyond the traditional reliance on real estate and construction. Industries such as mining, tourism, entertainment, and renewable energy are now contributing more significantly to the economy.
The transition towards clean and renewable energy is also evident in Saudi’s hefty investments in this sector, alongside electric mobility and the de-risking of fossil fuel assets, exemplified by the sale of Aramco shares.
The structure of the Saudi economy shows signs of diversification, with the share of the private non-oil sector in the total nominal GDP rising to 44.6% in 2023, up from 39.6% in 2022. Saudi Arabia’s improved positioning in the Economic Diversification Index (EDI) is another indicator of progress, with the kingdom advancing over 10 spots since 2000.
Despite these advancements, the kingdom’s reliance on oil remains significant. Revenue data from the first quarter of 2024 indicates a 4% year-on-year growth, with non-oil revenues increasing at a faster pace than oil revenues. Taxes on goods and services rose by 11%, while taxes from income, profit, and capital gains saw a 9% decline.
The budget deficit persists, with a forecast of SAR 79 billion for the current year. Al-Jadaan, in a statement regarding the quarterly budget performance, emphasized the strategic nature of the deficit, viewing it as an investment in the country’s economic development rather than merely a financial shortfall.
As the nation anticipates the unveiling of the new budget, an anonymous employee from a Saudi media company expressed the prevailing uncertainty, Nobody knows what the new budget will be for state-backed Saudi companies, but the cost-cutting may have something to do with anticipated budget cuts.