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This desert kingdom is pushing ahead with multibillion-dollar plans to build a spate of new cities despite the coronavirus pandemic and depressed oil prices, betting that projects closely associated with the crown prince will kick-start its economic recovery.
The developments include a futuristic city-state called Neom in the country’s remote northwest Tabuk province, a sports and entertainment city outside Riyadh, luxury tourism resorts spread across an archipelago of pristine Red Sea islands and an ancient Arabian trading post turned wildlife reserve called al-Ula.
They are all part of Crown Prince Mohammed bin Salman’s plan to diversify the economy away from oil by attracting foreign investment and boosting domestic consumption. The giant projects are designed to spawn industries such as tourism and entertainment that haven’t existed before in cloistered Saudi Arabia, even as those sectors suffer globally under social-distancing guidelines imposed to curb the spread of the virus.
“It seems like that will be a real uphill battle,” said Robert Mogielnicki, resident scholar at the Arab Gulf States Institute think tank in Washington, D.C. So far, he said, “The broader aim of attracting global multinational companies…hasn’t panned out.”
After introducing tourist visas last September for the first time, the kingdom issued about half a million before the pandemic hit and it closed its borders, including to its most vital source of tourism income: religious visitors.
Despite the downturn, the authorities say they remain committed to attracting 100 million visits a year by 2030, up from about 40 million last year.
Hosam Alqurashi, chief marketing officer at the Royal Commission for Riyadh City, which oversees $800 billion in plans to double the capital’s population in a decade, said the kingdom’s leadership saw the quarantine period as an opportunity to accelerate some projects.
“Overall, the direction from the crown prince was to press on and move as fast as we can and as hard as we can with the projects, no slowdowns on anything,” Mr. Alqurashi told a U.S. Chamber of Commerce event last month in remarks reviewed by The Wall Street Journal. “The country is determined, our projects are pretty much on track and nothing will slow them down.”
To that end, dozens of highly paid management staff—foreign citizens working on the projects in Saudi Arabia who were stranded abroad after the country barred international arrivals to combat the virus—were brought back on chartered jets. Hundreds of employees have been sent out to live in prefabricated cabins at the project sites, where the ground is still being leveled.
“They were told: You’re either here or you’re out of a job,” said a former executive of one of the projects, who said he spoke with workers taking the flights.
Prince Mohammed is in a rush. As the world pivots away from hydrocarbons, his isolated, oil-dependent kingdom risks deeper economic trouble unless it adapts. Saudi Arabia’s gross domestic product shrank 1% in the first quarter, before the full impact of collapsing oil prices and the pandemic’s hit to global demand was felt. The International Monetary Fund expects it to contract 6.8% overall this year.
Before the coronavirus, Saudi Arabia was already struggling to attract the foreign investment needed to modernize its economy. The 2018 killing of dissident journalist Jamal Khashoggi by Saudi operatives sparked global outrage and led some potential investors, such as Richard Branson, to suspend talks with the kingdom, though other deals have proceeded.
The Central Intelligence Agency and many Western governments concluded that Prince Mohammed ordered Mr. Khashoggi’s killing inside the Saudi consulate in Istanbul—an assertion he denies.
With a budget deficit expected to reach nearly 13% of output this year—above International Monetary Fund benchmarks for emerging-market economies—Saudi Arabia’s finances are coming under strain. The authorities have already tripled the value-added tax rate to replenish government coffers and cut cash handouts meant to cushion a rising cost of living.
With nearly $450 billion in foreign monetary reserves and the world’s second-largest proven oil reserves, Saudi Arabia is unlikely to run out of money soon. The kingdom’s roughly $300 billion sovereign-wealth fund, the Public Investment Fund—headed by Prince Mohammed—finances the biggest projects; it recently got a $40 billion injection from the central bank.
A representative said that PIF’s financial commitment to the projects remains unchanged and that their timelines won’t be significantly affected by current economic conditions. Since the pandemic began, PIF has awarded a series of contracts, most recently to U.S. project management firm, Bechtel, to develop infrastructure at Neom, which currently has just a few royal palaces and workers’ camps.
When the pandemic began, many expected work on the projects would be slowed, especially since a raft of “economic cities” announced under the previous king have mostly floundered. Yet analysts say shifting away from mega-projects now is also risky.
Mr. Mogielnicki, the Washington-based scholar, said Saudi Arabia’s economic transformation was always going to be expensive and requires a level of commitment that would be politically costly to retract. “At this juncture, it would be difficult for policy makers to fold their hands and say, ‘That was the wrong decision, and it doesn’t make sense anymore.’”
The projects may eventually be shifted to attract more domestic investment and consumption. That has already started happening in at least one of the developments, Neom, as senior Western executives were replaced by Saudis. On Sunday, Neom announced an agreement with the Saudi energy ministry to cooperate on renewable energy, electricity production and artificial intelligence.
The projects are so big that PIF calls them gigaprojects. Neom, at an estimated cost of $500 billion and featuring experimental technologies such as a solar dome for water desalination, is to be 33 times larger than New York City in area. The Red Sea resort, which aims to build Maldives-style hotels hovering above the water, will be the size of Belgium. And a sports and entertainment city called Qiddiya, which will have a Six Flags theme park with the world’s fastest roller coaster, is expected to be 2½ times as big as Disney World.
Costs for other projects scattered across the country—including a wellness resort cum yacht marina dubbed the Riviera of the Middle East—haven’t been disclosed but are estimated to be in the billions of dollars each.
“It’s important to continue advancing in the execution of these projects to ensure their readiness to benefit from global post-pandemic economic recovery,” said Saudi economist Fadhel Albuainain, who pointed out that other countries are now considering large infrastructure projects to jump-start their stagnant economies.
In the desert just outside Riyadh, the scale of Saudi Arabia’s ambitions are evident at the Qiddiya site, where an 18-hole golf course and equestrian facilities alongside hotels, shops and entertainment venues are planned by 2023.
Dust spews into the air as jackhammers crush limestone hills into rocks that are then dumped to fill giant chasms in a 150-foot-high escarpment. Construction vehicles even out the plateau below where a racetrack and water park are meant to be built.
The earthworks began here just as the pandemic hit. In response to the virus, which has so far sickened more than 309,000 people in the kingdom and killed 3,722, the authorities imposed severe restrictions on public activity through June.
While most of the Saudi workforce was stuck at home, some 500 foreign laborers carried on flattening the land, relocating high-voltage electricity stanchions and installing water pipes. Their ranks are expected to quadruple as roadwork begins.
Qiddiya Chief Executive Michael Reininger, an American who worked on resort developments for Walt Disney Co., said the current economic situation didn’t affect future plans or strategy, with more than $260 million in contracts awarded since February. “Qiddiya has proudly sustained a ‘business as usual’ approach over the last few months,” he said by email, “with work continuing as normal.”
—Rory Jones and Summer Said in Dubai contributed to this article.
Write to Stephen Kalin at stephen.kalin@wsj.com
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