Saudi Arabia: The new Dubai?

Saudi Arabia could be going through one of its greatest transformations in decades. The Public Investment Fund (PIF), one of the largest sovereign wealth funds in the world, plans to increase its assets under management from $650bn currently, to as much as $1tn by 2025 and $2tn to $3tn by 2030. The sheer scale of its current investments – or “giga projects” – is incredible, with these giga projects being described by the PIF as:

“…designed to create new ecosystems and unlock new sectors… to stimulate the economy and their benefits are expected to expand significantly beyond the real estate and infrastructure sectors, helping to diversify the economy away from oil, especially given their sheer scale.”

There are currently five ongoing projects:

  • NEOM (the line city in the desert)
  • Red Sea (28,000 square kilometres of beach-type resorts)
  • Qiddiya (gaming and entertainment district)
  • ROSHN (affordable housing)
  • Diriyah (cultural and historical tourism)

However, each of these projects is incredibly ambitious, and they pose a number of questions: are they being assessed prudently; will they ever deliver economic benefits; and will Saudi Arabia end up bankrupting itself in the process?

Realistically, it will take five years or so before we can gauge the success of these plans – in that time, we should be able to get a sense of whether Saudi Arabia can attract net immigration, for example, which would give a good indication of its successes. However, right now, we are somewhat sceptical of these highly ambitious – and expensive – plans. Market valuations for its sovereign bonds don’t seem to account for these kinds of projects. In our strategy, we remain underweight Saudi Arabia’s sovereign bonds, as well as being underweight GRE credits, reflecting our relatively bearish view.

We appreciate, nonetheless, that many had the same doubts about Dubai around 50 years ago, and that can be considered a success story. Could Saudi Arabia follow in Dubai’s footsteps?

While Saudi Arabia is trying to follow the Dubai model, we believe it faces several limitations in achieving that model. First, Dubai’s GDP per capita is about $50k, whereas Saudi Arabia’s is just half of that, yet it is running much more expensive projects than Dubai on a much larger scale, and it expects to be supported (at least to some extent) by its local population. Second, Saudi Arabia’s population is 10 times the size of Dubai’s, and the execution and governance of projects is likely to be much more difficult on such a scale. Third, the quality of its projects, at least superficially, doesn’t seem to be as high as in Dubai. It is not a service-based economy like Dubai, and getting the local population to enter that mindset could prove difficult. Fourth, there is some back and forth about how open Saudi Arabia wants to be; it maintains several policies that are not business friendly (e.g. in the real estate sector), and as such, the country ranks low on the ease of doing business scale. Fifth, it appears that Riyadh is already too slow in developing its infrastructure; the traffic is bad, and the metro isn’t on track for completion this year. Anecdotally, several Dubai-based businesses have told us that many of the western businesses that would like to operate in Riyadh are having to operate from Dubai instead, as Saudi Arabia’s infrastructure isn’t developed enough. There are vast areas in places like Jeddah which have been demolished to be rebuilt, but there already seems to be a bottleneck as the pace isn’t keeping up.

On the positive side, the economy and the culture are opening up incredibly fast. Women have only been allowed to drive since 2021, yet it is now commonplace to see women driving, as well as working in the immigration police. Female participation has increased rapidly, and in all of our company meetings, we met with several senior management-level female employees. Mohammed bin Salman seems to be popular among the local population broadly speaking, and people seem to appreciate the changes he is making, especially around the defanging of the religious police. Furthermore, new and upcoming areas in Riyadh are not dissimilar to Dubai, with a much more international feel.

In summary, while the market is booming in Saudi Arabia, and the changes we’re seeing there could prove transformational, we remain relatively cautious about its ambitious plans, and we believe that it could be heading towards some bumpy times over the coming years.

Oman: A much sleepier feel

Moving from Saudi Arabia to Oman, the pace immediately dropped to that of a sleepy town with a stark absence of cranes. Oman’s debt is on a path towards being upgraded to investment grade. The country is running a fiscal and current account surplus this year, of around 2% for both. There doesn’t seem to be a big sense of urgency on projects, and it seems like its economy’s capacity has already been hit. It doesn’t appear to be looking to expand its local economy much, instead preferring to invest abroad; leverage across its businesses has come down a lot, so the lack of expansion isn’t too surprising. Valuations are generally also quite tight. We have had some exposure to several government-related entities for some time; it is mostly a crowded trade at this point, and we are unlikely to see further spread compression.

The UAE: Hot real estate market

The UAE has introduced a golden visa, along with other supporting policies, in an attempt to increase the population from 3.6m to 5m – and so far, it seems to be working. The country is also trying to carefully position itself to benefit from the Saudi Arabia expansion story. While the influx of Russian migrants appears to have slowed, net immigration from India, Pakistan and Britian looks fairly strong. As previously mentioned, it seems that many businesses are setting up shop in Dubai for the time being, partly so that they can operate closer to Saudi Arabia.

The main thing that stood out for me was how hot the real estate market has become across the residential, commercial and retail segments – there is a sense that the real estate market is getting a bit too expensive. However, leverage in the sector is much lower than it was ahead of Dubai’s previous real estate market crash. Supply also isn’t huge, so we expect its real estate market will likely remain strong for at least a year. We have some exposure to the UAE’s real estate market, and we remain comfortable with that positioning following the trip.

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