Saudi Vision 2030--the Saudi Arabian government's transformation program to increase the country's economic, social, and cultural diversification--will require around $1 trillion in investments over several years, according to public sources. Part of this sum will come directly from the government and the Public Investment Fund, but S&P Global Ratings also expect banks and capital markets to contribute a significant amount. In our view, this will inevitably increase leverage in the Saudi private sector and the broader economy, albeit from low levels. The pace and extent of the increase in leverage in the corporate sector remain uncertain.
What's Happening
Lending growth in the Saudi banking system over the past five years was mainly down to a rise in mortgages. This is one reason why we haven't seen lending growth translate into a material increase in publicly listed corporate debt. In addition, companies in Saudi Arabia have been cautious about committing to large capital expenditure due to high interest rates.
The energy, health care, and materials sectors recorded debt-to-equity ratios of 0.5x–0.7x in 2023, which is low compared to other sectors. Companies in these sectors continue to rely substantially on their internal cash flow to finance their working capital and investment needs.
Even though listed companies' leverage remains manageable, we expect that debt is building up in the private sector, that is, among unlisted entities, supporting strong corporate growth. It is worth noting that the structure of corporate balance sheet debt is changing, with a growing contribution from international debt versus domestic debt.
Why It Matters
Structurally higher private-sector leverage could create imbalances and pose asset-quality problems for the Saudi banking system further down the line. The banking system remains in relatively good shape, with strong asset-quality indicators and capitalization overall. We expect banks' sound profitability and conservative dividend payouts to continue supporting their capitalization over the next one-to-two years.
On a positive note, in addition to raising debt, Saudi companies have been active in raising new equity through IPOs in 2022 and 2023, albeit at a slow pace. In the year to May 2, 2024, 13 private companies have announced potential listings on Saudi Arabia's main market and its Nomu parallel market. Along with strong internal cash flow generation, this will help contain the buildup of corporate debt.
What Comes Next
We will continue to monitor debt buildup in the Saudi economy. However, we expect it to be gradual, and potentially concentrated in some companies within the Public Investment Fund portfolio. We expect real GDP growth of 2.2% in 2024 and 5.0% in 2025 for Saudi Arabia. Non-oil growth will contribute a growing share of this because of government-led investments in Saudi Vision 2030 projects.
While large companies still have relatively good access to international capital markets, higher-for-longer rates and geopolitical risk could mean higher spreads for the weakest companies. At the same time, banks will have to find alternative ways to fund their growth (see "Your Three Minutes In Banking: Saudi Banks May Turn To Alternative Funding Options," published April 30, 2024). This is why we expect the increase in leverage to be gradual.
Related Research
- Your Three Minutes In Banking: Saudi Banks May Turn To Alternative Funding Options, April 30, 2024
- Credit FAQ: How Will Saudi Banks Fare In 2024?, Feb. 5, 2024
- Ratings On Saudi Arabia Affirmed At 'A/A-1'; Outlook Stable, March 15, 2024
- GCC Corporate And Infrastructure Outlook 2024: Holding Up Against Refinancing Needs, March 4, 2024
- Banking Industry Country Risk Assessment: Saudi Arabia, Sept. 22, 2023
- Saudi Arabia's Debt Market: Ready For Takeoff, June 19, 2023
This report does not constitute a rating action.
| Primary Contact, Banks: | Zeina Nasreddine, Dubai + 971 4 372 7150; zeina.nasreddine@spglobal.com |
| Primary Contact, Corporates: | Sapna Jagtiani, Dubai + 97143727122; sapna.jagtiani@spglobal.com |
| Secondary Contact: | Mohamed Damak, Dubai + 97143727153; mohamed.damak@spglobal.com |
| Research Contributor: | Bedanta Roymedhi, Dubai +971 (4) 3727100; bedanta.roymedhi@spglobal.com |
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