Saudi Arabia's $1 Trillion Capex
Saudi Arabia's Strategic Investment Shift and Financing Challenges
Table of Contents
- Overview of Saudi Arabia's $1 Trillion Capex Plan
- Shift from Oil: A Strategic Reallocation
- Focus on Clean Energy and Renewable Investments
- Diversification into Mining, Transportation, and Logistics
- Financing the Capex Super-Cycle: Challenges Ahead
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Only one-quarter of $1 trillion Saudi capex to be for oil
In what Goldman Sachs Research is calling a "capex super-cycle," Saudi Arabia is expected to invest US$1 trillion across six strategic sectors by 2030. But the oil industry is likely to get a smaller portion of this than had been projected earlier. "About 73% of the investment funds will go to non-oil sectors," Faisal AlAzmeh, who runs CEEMEA equity research and covers natural resources, chemicals, and infrastructure in the Middle East, wrote in his team's report. An earlier forecast pegged non-oil investment at 66%.
Clean energy, for instance, has its expected funding increased to $235 billion from a forecast of $148 billion. The increase will mainly be driven by renewables as Saudi Arabia has more than doubled its 2030 capacity target. Most of the funds are also going in sectors that facilitate diversification of the economy from oil, such as metals and minerals, transport and logistics, and digitalization.
Saudi Arabia is preparing for a greener future
Capex in the oil sector under a directive by the ministry of energy of Saudi Arabia may shrink by $40 billion during 2024-2028. Nevertheless, natural gas continues to be "a key contributor to the country's decarbonization, economic development, and diversification plans," AlAzmeh writes. His team's number for potential Saudi investment in "upstream" oil and gas has been revised down, now $190-220 billion from its former figure of $230-260 billion. Meantime, the government has quickened its renewable energy pace in the last year. By June 2024, Goldman Sachs Research had confirmed that there was a solar photovoltaic capacity of close to 11 GW in the execution pipeline, besides 16.7GW in solar/wind capacity in planning levels. The Saudi government increased its solar energy target by 2030 from 58.7 GW to 100-130 GW.
In trying to diversify away from oil, the other sectors Saudi Arabia is focusing on include energy. Some of them are in mining, where Saudi Arabia aims to grant more than 30 mining exploration licenses this year and recently created a $182 mineral exploration incentive program to attract more investments in the industry. The other area is transportation and logistics, where Saudi Arabia would like to become a logistics leader and a global gateway for mobility. The government is to put in nearly $100 billion in aviation, another $100 billion or so on electric vehicles, logistics, and other sub-sectors.
How Saudi Arabia will pay for its $1 trillion investment plan
The oil prices average between $80-$85 a barrel, with production cut to 9 million barrels a day; pressure is moderately rising on the budget of the Saudi Arabian government. Goldman Sachs Research estimates that the country's budget deficit will widen to 4.3% of GDP this year, up from 2% last year. Around 2.6 percentage points of the deficit emanate from increased spending, with the rest driven by lower oil revenues. How a higher deficit would impact the pace of planned investments is unclear. "But we think the Capex Super-Cycle will likely remain an important theme in Saudi Arabia for the foreseeable future," our analysts write.
Finding the money to invest in the super-cycle will bring its own challenges. Saudi Arabia has traditionally relied on bank loans to support growth. Indeed, the most recent data from May 2024, indicated that the liquidity situation remains extremely tight in Saudi Arabia, with loans continuing to grow at a faster pace than deposits. Goldman Sachs Research also recently projected that the country needs to tap alternative sources of financing to bridge a structural funding gap for capex of an estimated $25 billion per year.
Efforts have been made by the Saudi government in creating and furthering its equity capital markets to reduce its banking sector's burden. A more recent key development has been the progress made in debt capital markets, where the government's Public Investment Fund has been an active issuer of bonds. So far in 2024, the PIF has issued bonds worth $7.8 billion.
Saudi Arabia's ambitious $1 trillion capex plan marks a significant shift in its economic strategy, with a focus on diversifying away from oil and investing heavily in clean energy, infrastructure, and other key sectors. While the proportion of investment directed towards oil is smaller than previously anticipated, substantial funding is being allocated to renewables, digitalization, and strategic industries like mining and logistics. Despite facing challenges related to financing and a widening budget deficit, the government's commitment to a greener, more diversified economy is evident. As Saudi Arabia navigates this capex super-cycle, its ability to secure alternative funding and manage investment efficiently will be crucial in realizing its long-term economic goals.
