(Bloomberg) – In a gleaming white hangar on Saudi Arabia’s west coast last year, Saudi business and political elites gathered to praise one of Crown Prince Mohammed bin Salman’s riskiest bets ever.
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The first electric car assembled in Saudi Arabia with Lucid Group Inc. gleams under the factory spotlight, showing how the oil-built kingdom is attracting foreign capital and becoming a global hub for future industry. Designed to show the world.
The short-term reality is more complex. California-based Lucid is increasingly siphoning off Saudi funds to keep its operations afloat. Last week, it received a $1 billion cash lifeline from Saudi Arabia, on top of the $5.4 billion already injected by Saudi Arabia's Public Investment Fund (PIF).
Lucid, whose largest shareholder is PIF, was cited as an example of a foreign company investing in Saudi Arabia's multitrillion-dollar vision 2030 economic transformation plan. But Lucid's need for Saudi funding means that Saudi Arabia's hasty reinvention efforts are being paid for out of pocket at a time when Saudi Arabia relies heavily on oil wealth to attract companies. This is one sign that there is.
Read more: Lucid CEO says struggling EV maker is important for Saudi Arabia
“The government had to give Lucid a huge incentive,” said Karen Young, a political economist specializing in the Gulf at Columbia University's Center on Global Energy Policy.
He also discusses the difficulties foreign companies face in Saudi Arabia, a country with little experience in complex manufacturing or heavy industry outside the oil sector.
“Lucid is committed to a long-term partnership with PIF and supports Saudi Arabia's Vision 2030 goals,” CEO Peter Rawlinson said in a statement to Bloomberg. “Lucid is creating hundreds and ultimately thousands of new job opportunities for Saudi talent.”
PIF did not respond to requests for comment.
Saudi Arabia has long recognized that the majority of its financial needs are supported by local capital and only some by foreign funds. Still, India wants to achieve $100 billion in annual foreign direct investment by 2030, about three times what it has achieved so far and about 50% of what India gets today. . From 2017 to 2022, annual FDI inflows to Saudi Arabia averaged just over $17 billion. According to a statement from the Ministry of Investment, preliminary data for 2023 shows that FDI is below target at around $19 billion.
Scaling up to the 2030 target remains out of reach as foreign investors remain cautious, according to conversations with bankers, lawyers advising investors, and people familiar with Saudi Arabia's fundraising activities. It seems like it's somewhere out of reach.
Read more: Saudi budget reverts to old ways as oil habit proves difficult to overcome
This led to calculations as the government considers the possibility of self-financing much of the economic reconstruction on a tight schedule. It has already begun shedding megaprojects to revamp its $1.1 trillion economy. And it is issuing billions of dollars in bonds to cover a budget deficit that it did not anticipate until late last year.
How that money is spent will influence domestic and international investment and oil policy that shapes global markets.
“It's insanely expensive”
The crown prince, or MBS as he is known, wants to transfer expertise to foreign investors and co-fund mega projects like the Neom development. Its $500 billion plan envisions turning the remote northwest region into a carbon-free, high-tech hub filled with robots.
Neom has been conducting marketing and investor roadshows, but has not yet made any serious progress in raising funds, according to people familiar with the matter.
Projects are facing headwinds not only along less developed coastlines. More than $1 trillion has been pledged for an entertainment city near the capital called Qiddiya, which is fully supported by PIF and its Saudi development company, he said. Two people familiar with the matter said.
“If there is no clear evidence of further funding by the end of the year, it is certainly worth asking where the money for these projects will come from,” said David Dawkins of London-based investment data firm Preqin. Ta. Analyze trends in Saudi Arabia. “They are very expensive.”Delays in regulatory approvals for Neom leave investors with question marks. Many people say they are hesitant to contribute money to the kingdom, often because of unclear and untested laws governing contracts and investments.
There are signs that the introduction of further external capital is gaining momentum. There were 232 investment deals concluded in 2023, many with a “substantial” component of overseas investment, which could “start to impact” FDI figures in 2024, the Ministry of Investment said. said in a statement. 's cloud division led a group of companies that agreed to invest more than $10 billion in Saudi data centers.Read more: Saudi manufacturing push attracts SoftBank and Chinese surveillance firms
shrinking money pot
But the government is running out of cash and ramping up efforts to attract more foreign funding. Earlier this year, the country asked its smaller neighbor Kuwait for more than $16 billion in loans for projects including Neom, officials said.
At stake for MBS is an ambition synonymous with Vision 2030. Companies like U.S.-based Air Products have signed joint ventures with Neom, but Saudi Arabia is still required to underwrite nearly the entire cost (roughly half). Current economic output.
“It's effectively still a public sector-led development model,” said Monika Malik, chief economist at Abu Dhabi Commercial Bank PJSC. “Right now they are committed to this transformation plan and I think they will continue to do so.” he said. It remains a largely Saudi-led development plan. ”
How Saudi Arabia spends its money will have repercussions around the world, as Saudi Arabia's investments stretch from London airports to golf and private equity, making it an important source of capital for Wall Street and governments alike. I'll call you. To fill the domestic cash gap, Saudi Arabia will turn to making money the way it does best: oil.
Read more: Saudi banks embark on record bond binge on mega-projects
This recognition begins an approach that consolidates spending authority in the hands of the PIF. Saudi Arabia recently granted the fund an additional $164 billion in Saudi Aramco stock, equating to at least $20 billion in dividend payments this year.
Mohamed Abu Basha, head of research at Cairo-based investment bank EFG Hermes, said the move is essentially “raising public funds on one side at the expense of the other.” said.
He said this shows how Saudi Arabia continues to rely on high oil prices to sustain its diversification plans.
Jean-Michel Saliba, Middle East and North Africa economist at Bank of America, said Saudi Arabia is likely to insist on long-term production curbs by OPEC+, the oil cartel it leads with Russia, and that this will lead to lower prices. He said that it is connected to the underpinnings of the
But even as production cuts limit supply, prices remain below the maximum price needed to finance his grand ambitions. According to Bloomberg Economics, when the PIF accounts for domestic spending, Saudi Arabia needs at least $108 a barrel of oil to balance its budget. Brent crude oil has soared in recent weeks but remains below $90.
be careful of gaps
PIF is already feeling the pinch. The company manages about $900 billion in assets, but had only $15 billion in cash as of September.
Read more: Saudi wealth fund eyes bond sale, IPO to finance spending ambitions
The fund used to allocate about 30% of its capital to overseas investments, but now aims to allocate 20% to 25%, but Yasir Al Rumayan, the fund's president, said there is no absolute guarantee. The number is still expected to increase over time.
“Our deployment will continue internationally, but our focus at the moment is on projects in Saudi Arabia,” he said in February.
Finance Minister Mohammed al-Jadaan also acknowledged the lack of funds and suggested the possibility of issuing additional bonds. He is also part of a committee chaired by MBS that will examine the huge financial needs of Vision 2030 and consider any conflicts with the kingdom's expected revenue sources.
“There was a gap,” he said on Tomanja's Socrates podcast. “We called it a gap study.”
Delaying or eliminating some projects would close the gap, he said, without elaborating.
Read more: Saudi Arabia says for the first time that some 2030 projects will be delayed
This marks a crossroads for some of Saudi Arabia's most ambitious projects. Priority could start to be given to people in Riyadh, where Expo 2030 is scheduled to be held. And people like Lucid will see the kingdom putting in more money, not less. Saudi Arabia sees this as part of a broader plan to build an automotive supply chain, with PIF also partnering with suppliers such as Hyundai Motors and Italian tire maker Pirelli & C. SpA.
But other parts of the Vision 2030 dream will disappear or be scaled back, according to people familiar with the matter.
“Some of it was a strategy that we told ourselves, really, we don't need to spend money on this,” Jadaan said.
–With assistance from Abeer Abu Omar, Fiona MacDonald, Dinesh Nair, and Matthew Martin.
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