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Even with more debt to finance gigaprojects, the government’s balance sheet is looking okay: The government’s net asset position “will deteriorate but remain strong, alongside prudent fiscal policies” with the controlled rise in government debt to finance projects under Vision 2030, according to the base scenario of an S&P Global report. The report’s base case sees both changes to project timelines and large public- and private-sector investments “could mitigate the impact on the government’s balance sheet.” It then builds out three other scenarios in which the government takes on more debt to finance the projects.
The details: In its base scenario, the credit agency sees the Kingdom’s debt-to-GDP ratio rising to 26% by 2027, up from 14% in 2017, to accommodate rising financing needs for big Vision 2030 projects. PIF funding accounts for c. 30% of total debt issuance in the base case. The economy is expected to maintain a net asset position of 47% of GDP in 2027. This means that after subtracting the government’s debt from its liquid assets, we will still have liquid assets that are worth 47% of GDP.
What’s driving the base scenario: Top of the list is the government’s newly-adopted strategy of pacing out growth at a rate that doesn’t strain public finances, add additional burden to its import bill, or crowd-out private-sector access to domestic bank financing. The expected debt-to-GDP ratio also factors in potential private sector and external investments, including Neom looking to raise SAR 5 bn in sukuk issuances this year alone. The capital market is also maturing to a level where listed companies are deliberately looking for funding from outside the local banking system leaving the economy with breathing room.
Beating the G20 average on both fronts: The forecasted hike in debt-to-GDP falls far below the expected 79% increase in debt-to-GDP ratio for G20 countries — on average.G20 countries are also expected to struggle with a net debtor position of 63% over the same period.
The alternative scenarios: The financial solutions provider drew three scenarios in which the government and PIF issue more debt than expected for Vision 2030 projects and other spending costs. In the most pessimistic scenario — in which total government debt issuances hit USD 110 bn over the next six years, as opposed to the USD 30 bn assumed in the base case — the government would flip to a very slight net debt position by 2030.
What could make the alternative scenarios materialize: Potential triggers include expected foreign investments falling through, or the government and PIF continuing to line up debt to finance their diversification ambitions. PIF funding would account for the majority of total debt issuances at 55% in the alternative scenarios. Other downside risks include a decline in oil prices and / or sustained oil production cuts.
Backing it all: Each of the scenarios in the report is based on the assumption of that Brent crude will be at USD 85 per barrel in 2024 and then USD 80 through 2027. They also presume the government will raise debt rather than sell assets — and they assumes no significant interest rate hikes, which would raise the cost of debt service.
