Saudi Arabia’s ‘capex super-cycle’ pivot to non-oil sectors: Goldman Sachs

Saudi Arabia’s investment strategy is undergoing a massive shift, notes Goldman Sachs, projecting that the kingdom will channel $1tn into six strategic sectors by 2030. This massive capital expenditure, dubbed a “capex super-cycle,” is increasingly focused on non-oil sectors, marking a departure from previous forecasts.

Non-oil sectors to benefit

According to the report by Faisal AlAzmeh, head of CEEMEA equity research at Goldman Sachs, approximately 73 per cent of the projected investment will be allocated to non-oil industries.

This is a notable increase from earlier predictions that estimated 66 per cent would be directed outside of oil.

Sectors such as clean energy, metals and minerals, transport and logistics, and digitalisation are expected to see significant funding as part of the kingdom’s economic diversification efforts.

Renewables lead the capex charge

One of the key areas of growth is clean energy, which is set to receive $235bn in funding—an increase from the previously forecasted $148bn.

This surge is primarily driven by Saudi Arabia’s ambitious plans to more than double its renewable energy capacity by 2030. The kingdom has raised its solar energy target for 2030 to 100-130 GW, up from an earlier goal of 58.7 GW, reflecting the government’s accelerated progress in renewable energy projects.

Downscaling oil sector investments

In contrast, capital expenditure in the oil sector is expected to decrease by $40bn between 2024 and 2028, following a directive from Saudi Arabia’s energy ministry.

However, natural gas remains central to the kingdom’s decarbonisation and economic development plans. Goldman Sachs has revised its estimate of potential investments in upstream oil and gas to a range of $190-220bn, down from the previous forecast of $230-260bn.

Diversification

As part of its broader diversification strategy, Saudi Arabia is also focusing on expanding its mining sector.

The kingdom plans to issue more than 30 mining exploration licences this year and has launched a $182m mineral exploration incentive programme to attract further investment.

Additionally, the government is set to invest around $100bn each in aviation and in sectors like electric vehicles and logistics, aiming to establish Saudi Arabia as a leading logistics hub and international travel destination.

Read: Saudi Arabia moves to tap its mineral reserves, invites bids for gold and copper mines

Challenges in funding 

Despite the ambitious investment plans, Saudi Arabia faces challenges in financing this $1tn capex super-cycle.

With oil prices hovering around $80-$85 per barrel and production reduced to 9 million barrels per day, the government’s budget is under increasing pressure. Goldman Sachs Research predicts that the budget deficit will widen to 4.3 per cent of GDP this year, up from 2 per cent last year, driven by both increased spending and lower oil revenues.

Alternative financing strategies

To bridge the estimated $25bn annual funding gap for these projects, Saudi Arabia will need to explore alternative financing sources.

The kingdom has traditionally relied on bank loans to fuel growth, but recent data from May 2024 indicates that loan growth is outpacing deposits, tightening liquidity in the banking system.

In response, the Saudi government has been working to develop its equity capital markets and has made significant progress in the debt capital markets, with the Public Investment Fund issuing $7.8bn in bonds so far in 2024.

Outlook

Despite the financial challenges, Goldman Sachs analysts believe that the capex super-cycle will remain a central theme in Saudi Arabia’s economic strategy for the foreseeable future, underscoring the kingdom’s commitment to diversifying its economy and reducing its dependence on oil.