Economy

The cost of Neom has been estimated to be as high as $1.5 trillion.
This year, however, has seen a sharp change in direction in terms of spending for the kingdom.
“Saudi Arabia has poured tens of billions into projects that have yet to hint of any financial returns,” one financier told CNBC.

Digital render of NEOM’s The Line project in Saudi Arabia
The Line, NEOM

In Saudi Arabia’s northwestern desert, a sprawling construction site replete with cranes and pile drivers sits encircled by a recently-built road. A pair of tracks cuts through the site like deep gashes through the sand, comprising the spine of what planners say will be a high-speed rail system.
The skeletal infrastructure forms the foundations of The Line, a multi-billion dollar high-tech city that its architects say will eventually house 9 million people between two 106-mile long glass skyscrapers more than 1,600 feet high.

The project, whose estimated cost is in the hundreds of billions, is just one of the hyper-futuristic venues planned in Neom, the brainchild of Saudi Crown Prince Mohammed bin Salman and a region that the kingdom hopes will bring millions of new residents to Saudi Arabia and revolutionize living and technology in the country. It’s a core pillar of Vision 2030, which aims to diversify the Saudi economy away from oil revenues and create new jobs and industries for its burgeoning young population.
The cost of Neom has been estimated to be as high as $1.5 trillion. In the years since it was announced, Saudi Arabia’s Public Investment Fund, the mammoth sovereign wealth fund now overseeing $925 billion in assets, has poured billions into overseas investments, with ever-increasing waves of foreign investors flying to the kingdom to raise cash.
This year, however, has seen a sharp change in direction in terms of spending, with a stated emphasis on keeping investments at home along with reports of cutting costs on megaprojects like those in Neom. The changes come as the Saudi deficit grows and the outlook for oil demand, along with global oil prices, sees sustained lows.

Construction for The Line project in Saudi Arabia’s NEOM, October 2024
Giles Pendleton, The Line at NEOM

That begs the question: does Saudi Arabia have enough money to meet its lofty goals? Or will it have to be more flexible to make its spending trajectory sustainable?
One Gulf-based financier with years of experience in the kingdom told CNBC: “The PIF’s pivot towards domestic investments, widely acknowledged but now officially admitted, suggests that there is still a lot of spending needed. Saudi Arabia has poured tens of billions into projects that have yet to hint of any financial returns.”

The financier spoke anonymously as they were not authorized to speak to the press.
Andrew Leber, a researcher at Tulane University who focuses on the political economy of the Middle East, believes that the current pace of spending won’t last.
“The number of ‘we pay up front and hope for economic returns later’ giga projects that are currently underway is not sustainable,” Leber said.
“With that being said,” he added, “the Saudi monarchy has shown itself to be somewhat flexible whenever economic realities assert themselves. I do think that eventually, a number of projects will be quietly shelved in order to bring its fiscal outlays back into greater sustainability.”

Digital render of NEOM’s The Line project in Saudi Arabia
The Line, NEOM

Saudi Arabia in October cut its growth forecasts and raised its budget deficit estimates for the fiscal years 2024 to 2026 as it expects a period of higher spending and lower projected oil revenues. Real gross domestic product is now expected to grow 0.8% this year, a dramatic drop from a previous estimate of 4.4%, according to the ministry of finance.  
The kingdom’s economy also swung dramatically from a budget surplus of $27.68 billion in 2022 to a deficit of $21.6 billion in 2023 as it ramped up public spending and decreased oil production due to its OPEC+ supply cut agreement. Its government forecasts a deficit of $21.1 billion for 2024, projecting revenue at $312.5 billion and expenditures at $333.5 billion.
Saudi authorities expect that the budget will remain in deficit for the next several years as it pursues its Vision 2030 plans, but they add that they are fully prepared for this.

“Our non-oil revenues have grown significantly, now it covers about 37% of expenditure. That’s a significant diversification, and that gives you a lot of comfort that you can maneuver and be stable despite the fluctuation in oil price,” Saudi Finance Minister Mohammed Al-Jadaan told CNBC in October. “Our aim is to make sure that our plans are stable and predictable.”
“We are not going to blink, we have significant fiscal resource under our disposal, and we are very disciplined in our fiscal position,” the minister said.
Saudi Arabia has an A/A-1 credit rating with a positive outlook from S&P Global Ratings and an A+ rating with a stable outlook from Fitch. That combined with high foreign currency reserves — $456.97 billion as of September, a 4% percent increase year-on-year, according to the country’s central bank — puts the kingdom in a comfortable place to manage a deficit, economists told CNBC.

Riyadh is successfully issuing bonds, tapping debt markets for more than $35 billion so far this year. The kingdom has also rolled out a series of reforms to boost and de-risk foreign investment and diversify revenue streams, which S&P Global said in September “will continue to improve Saudi Arabia’s economic resilience and wealth.”
When asked if the kingdom’s spending trajectory is sustainable, Al-Jadaan replied: “Absolutely, yes,” adding that the government recently published its numbers for the next three years and that “we think it is very sustainable.”
Still, many analysts outside the kingdom, as well as individuals working within the kingdom and on NEOM projects, are skeptical of the megaprojects’ feasibility. Reports that some projects have been dramatically cut down — in the case of the Line, its size target slashed from 106 miles to 1.5 miles and population target down from 1.5 million by 2030 to less than 300,000 — attest to that concern on a higher level.

Neom executives acknowledge that the current phase of work on The Line is for a building length of 1.5 miles — which would still make it the longest building in the world. However, the eventual goal of 106 miles has not changed, they say, stressing that cities are not built overnight and that construction is continuing apace.
For Tarik Solomon, chairman emeritus at the American Chamber of Commerce in Saudi Arabia, “it’s promising to see transparency and some project cutbacks.”
“The Kingdom’s rising external borrowing reflects challenges with Vision 2030 feasibility,” he told CNBC.
“Though debt remains manageable at 26.5% of GDP, continued small pressures add up, underscoring the need for fiscal discipline and achievable goals.”
Solomon pointed to the desire of many Saudi residents for improvements to the infrastructure they use in their daily lives — like Riyadh’s public transport, network connectivity, schools, and health care.
“The road to resilience for Saudi Arabia isn’t in figuring out ski slopes in the desert but in building with innovation, complexity, and the courage to pursue what’s truly impactful,” he said. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Heathrow’s incoming largest shareholder has thrown its weight behind expanding the UK’s largest airport, and said it would back management if it tried to build a third runway.French private equity group Ardian agreed to buy a 23 per cent stake in Heathrow in June, part of a £3.3bn shake-up in ownership at the airport which also saw Saudi Arabia’s sovereign wealth fund buy a stake.With the deal expected to complete before the end of next month, Ardian’s head of infrastructure Mathias Burghardt told the Financial Times that Heathrow needed to expand in the coming years.“Growth is in our DNA. We don’t invest in companies, or in infrastructure if they don’t have a growth plan,” he said. Heathrow’s chief executive Thomas Woldbye is within months expected to announce the airport’s first expansion plan since the pandemic, which will prioritise small-scale improvements to increase passenger numbers. He told an industry conference on Monday that Heathrow hoped to make a final decision on whether to press ahead with the planning process for a third runway by the end of 2025. But the only way to significantly increase capacity would be to build a new runway, a politically contentious topic that has remained unresolved for decades. Prime Minister Sir Keir Starmer’s cabinet is split over whether to back a third runway, the FT reported this month. Burghardt backed Woldbye’s plan, and said he would then support a third runway if there was “consensus” behind it.“The first thing is to grow the airport within the existing footprint, and then . . . how can we ensure growth beyond the existing footprint?”“If management designs growth, which could be a third runway . . . and if there is consensus, first with the government, but beyond that, other stakeholders, we certainly will support it for sure,” he said. But amid rising concerns about the difficulty of decarbonising aviation, Burghardt said any plans would be contingent on a credible plan to lower emissions. “Companies which are not prepared for that will really have problems in the future, and that will limit their growth,” he said. Asked whether Ardian would be willing to part-fund any big expansion — Heathrow’s third runway project was costed at about £14bn in 2019 — he replied: “Without being specific to Heathrow, our job is always to put [in] more money . . . the more capex, the more growth.”Ardian’s deal for a stake in Heathrow was followed this month by the Canadian pension investor PSP’s acquisition of the operator of Aberdeen, Glasgow and Southampton airports for £1.5bn, marking the latest investment in the British travel sector following the pandemic.Burghardt said that while travel had rebounded since the pandemic, it remained “difficult to say what is normal” as the mix of passengers had shifted since video meetings had replaced some business trips.He also said the UK remained an attractive market for investment, even amid fears that struggles at Britain’s largest water utility Thames Water would deter private funds from backing other UK infrastructure.“We’ve been investing in the UK for a period of years,” he said. “I really believe the UK has demonstrated the strength of its institutions.”However, he said that when Ardian sold its stake in the UK’s Anglian Water in 2014 the firm was “not convinced regulatory dynamics would evolve positively” in that sector, but that when it came to Heathrow and the airport sector “we believed that the existing regulation is a good regulation overall”. More

The $300bn deal for rich countries to help poorer nations struck at the UN climate summit early Sunday was only reached through frantic diplomacy, including a high-level meeting the night before in a VIP room of the Baku stadium.The meeting of ministers from both wealthy and developing nations included Colombian climate minister Susana Muhamad; Kenya’s Ali Mohamed; Brazil’s Ana Toni, Ed Miliband from the UK and Germany’s Jennifer Morgan, those aware of the late night Friday gathering told the FT.It took place as the countries gathered for the UN COP29 summit remained gridlocked over the size and shape of a landmark deal to provide money to developing countries hit by the worst effects of climate change. But it also came against the backdrop of a separate battle for the inclusion of an explicit reference to next steps in the transition away from fossil fuels agreed at the last year’s UN summit in Dubai, to strengthen the pledge. This was blocked by Saudi Arabia and Russia, and was only given an indirect reference in the final outcome, maintaining the status quo. However, fossil fuel reliant nations failed in their push for a reference to “transition fuels” — taken to mean gas — when the overall agenda item was postponed after objections from a Latin American and Caribbean nations alliance, Switzerland, the Maldives, Fiji, Canada and Australia.Ana Toni, Brazil’s national secretary for climate change, and UK energy secretary Ed Miliband were a key duo in shepherding the COP29 agreement More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is co-founder and chief investment strategist at Absolute Strategy Research‘It’s prices stupid’ was the key lesson that policymakers and markets should take from the US election, as voters appeared to judge the economy through the prism of high prices, rather than falling inflation, or low unemployment. It may be time for them to revisit their policy mandates.Economic concerns remained central to the US election for 80 per cent of Republican voters, second only to immigration. This was despite low unemployment, inflation heading towards 2 per cent, and expectations of lower interest rates. The main issue was the pandemic price shock was not transitory. Despite inflation moderating, as post-pandemic supply pressures eased, a common theme was how voters were being squeezed by elevated price levels, with real wages failing to keep pace. Incumbent administrations in the UK and France were also ushered from office due, in part, to similar economic concerns about prices.In the US, the prices of goods that households regularly purchase (food and petrol) were 28 per cent above January 2020 levels (18 per cent above where they should have been in a 2 per cent inflation world). In the UK, food, drink and energy prices are 30 per cent higher, while in the Eurozone, the European Central Bank’s ‘Frequent Out Of Pocket Purchases’ index is up 26 per cent since the pandemic. It’s no wonder people are hurting.Some content could not load. Check your internet connection or browser settings.There are several lessons policymakers might take away from these political outcomes. For a start, headline inflation matters to people more than “core” — current policy may be targeting the wrong variable. Central banks may feel they are better able to influence “core” prices with their policy, but by looking through shocks in food and energy prices, they are ignoring the prices that matter for most people. If policy had sought to bring demand and supply into equilibrium earlier, we might have seen lower peak inflation, less price persistence, and less political turmoil.But a more fundamental change may be required. Many big central banks have implicitly returned to setting monetary policy with reference to Taylor Rule models, where interest rates are anchored around how far the economy is from the inflation target, and the degree of slack in the economy. However, these elections suggest voters would prefer more price-level stability, over low inflation rates, or full employment.If that’s the case, then central banks might want to revisit an alternative policy framework; the idea of price-level targeting, as proposed by Professor Michael Woodford of Columbia University. In this framework, policy targets a constant rise in the level of prices over time, so that if prices rise above that rate, policy has to respond sufficiently to reverse any price level divergence. This contrasts with the current framework, which can celebrate a return to 2 per cent inflation, even though the target has been missed for multiple years, and has left households with major losses in real purchasing power. By encouraging early action to limit the initial divergence from the desired price levels, this framework can, theoretically, deliver gains for consumers.Some content could not load. Check your internet connection or browser settings.Another issue with the current inflation-targeting regime is that for economies with large services sectors, the centrality of labour costs to service-sector inflation means that squeezing real labour incomes has been a key part of achieving the inflation targets. Indeed, ever since Paul Volcker as Federal Reserve chair started bearing down on inflation from the end of the 1970s, the majority of the gains in productivity have been captured by companies, not labour. Inflation targeting was supposed to boost productivity through reducing uncertainty and encouraging investment. But trend productivity has actually slowed since the early 1980s. Companies boosted profits, not growth, by cutting investment, increasing dividends, and prioritising buybacks.Because inflation targeting has boosted returns to capital over labour, it may have also contributed to increasing income inequality. This disparity has probably played a role in the rise in populism in many countries.In conclusion, this year’s elections have been an implicit rejection of the current monetary framework. Despite low unemployment, elevated price levels have squeezed real wages for many, fuelling discontent. If politicians want to get re-elected, and central banks want to remain relevant to society, it may well be time for them to revisit their mandates. More

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SYDNEY (Reuters) – The dollar surrendered a little of its recent gains on Monday as investors assumed the pick for U.S. Treasury secretary would reassure the bond market and pulled yields lower, shaving some of the dollar’s rate advantage.Yields on 10-year Treasuries slipped to 4.351%, from 4.412% late Friday, as President-elect Donald Trump’s choice of fund manager Scott Bessent was welcomed by the bond market as an old Wall Street hand and a fiscal conservative.However, Bessent has also been openly in favour of a strong dollar and has supported tariffs, suggesting any pullback in the currency might be fleeting.”Bessent has publicly lauded dollar strength following news of Trump’s election win, so I admit to being somewhat perplexed by the suggestion that the weakening in the dollar is because of his appointment,” said Ray Attrill, head of FX research at NAB. “He is an avowed fiscal hawk, so perhaps that has something to do with it, but seeing is going to be believing in this regard.”The dollar was likely due some consolidation having risen for eight weeks in a row for only the third time this century and many technical indicators were flashing overbought.The index was last down 0.5% at 106.950, having hit a two-year peak of 108.090 on Friday. The dollar dipped 0.4% on the Japanese yen to 154.18, and further away from its recent peak of 156.76.The euro edged up 0.7% to $1.0496 and away from Friday’s two-year trough of $1.0332. Resistance is up at $1.0555 and $1.0610, with support around $1.0195 and the major $1.0000 level.The single currency had taken a hit on Friday as European manufacturing surveys (PMI) showed broad weakness, while the U.S. surveys surprised on the high side.The contrast saw European bond yields fall sharply, widening the gap with Treasury yields to the benefit of the dollar. Markets also priced in more aggressive easing from the European Central Bank, with the probability of a half-point rate cut in December rising to 59%.At the same time, futures scaled back the chance of a quarter-point rate cut from the Federal Reserve in December to 52%, compared to 72% a month ago. Markets now imply 154 basis points of ECB easing by the end of next year, compared to just 65 basis points from the Fed.Data on UK retail sales also disappointed, leading the market to price in more chance of a rate cut from the Bank of England, albeit in February rather than December.That saw the pound touch a six-week low on Friday at $1.2484. Early Monday, sterling had bounced 0.4% to $1.2591, but remained well short of last week’s top of $1.2714. In the crypto world, Bitcoin eased 1.2% to $98,208 after running into profit-taking ahead of the symbolic $100,000 barrier.Bitcoin has climbed more than 40% since the U.S. election on expectations Trump will loosen the regulatory environment for cryptocurrencies. More