Saudi Vision 2030 projects ‘to pick up’ on growth optimism

Neom

Saudi Arabia is expected to see a pick up in construction for its Vision 2030 projects and the services sector, driven by rising consumer demand and a growing workforce, S&P said in a report.

However, the vast scale and size of projects – estimated to be in excess of $1 trillion – suggest large funding requirements across the government and government-related enterprises, particularly the sovereign Public Investment Fund.

As a result the government is prioritising projects based on economic returns and reassessing timelines to prevent economic overheating and funding pressures, the report said.

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“We therefore project a more gradual execution of investments and that the government’s net asset position will gradually fall, but remain comfortably strong, through to 2027,” S&P said.

S&P revised its outlook on the kingdom to positive from stable and affirmed its “A/A-1” long- and short-term foreign and local currency unsolicited sovereign credit ratings.

Despite the momentum in non-oil sectors, lower oil production due to Opec+ cuts is expected to limit overall economic growth to 1.4 percent in 2024 from last year’s 0.8 percent contraction.

While debt will fund much of the development, S&P expects foreign direct investment and portfolio inflows to gradually increase from the current low levels.

The new investment law, effective from February 2025, seeks to achieve parity between domestic and foreign investors and simplify rules and regulations to make foreign investment more attractive.

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The government is also pushing large Saudi companies to invest SAR5 trillion ($1.3 trillion) into the local economy by 2030 through the “Shareek” programme.

While the Russia-Ukraine conflict has impacted global food and fuel prices, inflation in the kingdom remains under control, aided by price caps and the currency peg to the relatively strong dollar.

“We expect inflation will average 1.8 percent in 2024 and stay stable at those levels, though these projections could be threatened by supply-side constraints and Red Sea-related disruptions,” the report said.

Credit growth is anticipated between 8 percent and 9 percent over 2024-2026, down from 10 percent in 2023, driven primarily by corporate lending. The trend stems from fewer mortgage lending opportunities, given the high interest rates and implementation of Vision 2030 projects.

As lending growth outpaces deposits, banks will likely turn to external funding, potentially shifting the financial system toward a modest net external debt position.

“This structural shift introduces some exposure to changes in investor sentiment and capital flows. Overall, the Saudi banking sector will remain well capitalised,” S&P said.