DUBAI: Saudi Arabia faces the most precarious moment yet of its economic reinvention.

Eight years after now-Crown Prince Mohammed bin Salman unveiled Vision 2030, his blueprint for a life after oil, delays and scalebacks with the multi-trillion dollar makeover are laying bare the pressure on the kingdom’s finances.

With the budget in deficit for six straight quarters, Saudi Arabia has become the biggest issuer of international debt in emerging markets.

And its decision to cut oil production with the Organisation of the Petroleum Exporting Countries and its allies (Opec+) in 2023 has failed to raise export revenues substantially.

The Gulf country’s oil earnings have dropped around one-third from 2022 levels, when Brent crude averaged nearly US$100 a barrel thanks to Russia’s invasion of Ukraine.

That’s weighing on the kingdom’s overall economic stability as it keeps spending on Prince Mohammed’s huge projects, which include everything from the new city of Neom to tourist resorts, football leagues and artificial intelligence investments.

“The vision is facing a test of reality and there are adjustments being taken,” said Jean-Michel Saliba, Bank of America Corp’s Middle East and North Africa economist.

“It is a sign of maturity. I don’t think it’s a sign that the vision is being derailed.”

Goldman Sachs Group Inc found that Saudi Arabia’s sovereign-risk score - a measure that takes into account financial and governance metrics - worsened the most after Israel among emerging markets during the first half of the year.

A ranking by Morgan Stanley in June reached a similar conclusion, with the kingdom among “key laggards”.

“My biggest concern is that the rise in expenditure leads to substantial deficits that are structural, rather than temporary or cyclical,” said Justin Alexander, director of Khalij Economics and an analyst for consultant GlobalSource Partners.

Rising debt captures the changes in Saudi finances over the past decade.

While still low by international standards, the share of government debt to economic output has risen from 1.5% in 2014 and is on track to exceed 31% towards the end of the decade, according to the International Monetary Fund (IMF).

Saudi Arabia could draw more scrutiny in the bond market and from credit rating companies if the ratio “creeps up more rapidly than forecast”, said Alexander.

The government and other Saudi entities, including banks, the wealth fund and oil giant Aramco, have raised over US$46bil in US dollar and eurobonds so far this year.

That’s meant that Saudi Arabia has displaced China as the most prolific developing-nation issuer in international bond markets.

“The financial deficits will have to continue being funded by both external issuance on the eurobond front and domestic issuance,” said Carla Slim, an economist with Standard Chartered Plc.

Still, the government has the flexibility - as it’s already showing - to reduce or delay investments in its so-called giga-projects, according to Jim Krane, a fellow at Rice University’s Baker Institute for Public Policy in Houston.

“Since there’s no organised political opposition, there is little harm in scaling back or even making a dramatic U-turn on your 10-year development plan,” said Krane.

The country’s external financial position is under pressure as it ramps up imports.

The current account balance - the broadest measure of trade and investment - will drop to almost zero in 2024 and shift into deficit from next year, the IMF forecast, after being in surplus to the tune of 13% of gross domestic product in 2022.

One result is “an unprecedented increase” in the foreign liabilities of Saudi lenders, according to Barclays Plc, given their growing role of providing hard currency to help meet domestic financing needs.

Local liquidity for Saudi banks remains stretched, as measured by the interest rates they charge one another for loans. The three-month Saudi Interbank Offered Rate has averaged a record of more than 6% this year.

The IMF said the Saudi government needs Brent to be nearly US$100 a barrel to balance its budget, about US$15 more than current levels.

Bloomberg Economics estimated the break-even price at US$109 per barrel, once domestic spending by the Public Investment Fund - the sovereign wealth fund - is taken into account.

Foreign direct investment has been slow to materialise outside the oil and gas sector, making it harder for the crown prince to make his ambitions a reality.

The government wants to attract US$100bil of foreign direct investment annually by 2030, a haul roughly three times bigger than it’s ever achieved.

Inflows reached around US$2.5bil during the first quarter, according to government data, a fraction of this year’s goal.

 - Bloomberg