Saudi private healthcare providers are set to benefit from strong demand for their services thanks to population growth and the government's ambitious targets under its national transformation program, Vision 2030. S&P Global Ratings estimates that to meet this demand, the country will need to add about 30,000 more public and private hospital beds between 2023 and 2030.

It's therefore not surprising that one of the Saudi government's top priorities is the development of the healthcare sector. As the country accelerates the implementation of its national transformation program, growth opportunities for private healthcare providers are increasing, but so are challenges.

For example, we expect to see a widening gap in terms of hospital-bed availability between densely populated cities and more remote areas where demographic developments are less favorable. This means that private healthcare providers' profitability will vary depending on the regions they serve. Payor profiles also differ across the sector, and so we expect working capital management to remain key in determining cash flow visibility and capital allocation.

Favorable Demographics Should Fuel Demand For Private Healthcare

We anticipate that the strong demand for private healthcare in Saudi Arabia will continue, thanks to:

• A growing population and a high proportion of people below the age of 40;
• National transformation initiatives to encourage private investment in the healthcare sector; and
• The introduction of mandatory healthcare insurance in the country, which has increased the number of healthcare services that insurance companies cover.

We expect population growth of about 3% on average per year in Saudi Arabia in 2024-2027 (see chart 1). This matches economic activity and growth, particularly in the non-oil sectors. The country's unique demographic dynamics should also support the demand for healthcare in the longer term. In particular, more than 70% of the population is below the age of 40 (see chart 2), indicating an aging population in the medium term. This, coupled with higher life expectancy, should increase the demand for healthcare.

In addition, Saudi Arabia's expats comprise about 40% of the population, lower than in neighboring countries such as Dubai, where the proportion is about 92%. In our view, this should provide more demand stickiness in case of an economic downturn, particularly since Saudis account for most private-sector inpatients (62% in 2019).

Notably, most demand arises in three provinces--Riyadh, Makkah, and the Eastern Province. These represent about 65%-70% of the total population, including a high concentration of expats (see chart 3).

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Government Initiatives And Mandatory Insurance Also Support Demand

Transformation objectives for the Saudi healthcare sector focus on improving the country's livability, the quality and efficiency of healthcare services in cities, and access to these services. As a result, the national transformation program targets a hospital bed density of 2.7 beds per 1,000 people by 2030. This compares with 2.4 in 2023, based on estimated population data, and is more in line with the global average.

Based on this target, and our expectation of population growth of about 3% per year in Saudi Arabia in 2024-2027, we estimate a need for an additional 30,000 hospital beds between 2023 and 2030 (see chart 4). This will require additional investment in the sector. Positively, in March 2021, the Saudi Council of Ministers approved the privatization law to encourage private investment in the healthcare sector, and many private healthcare providers have announced expansion plans since then.

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Notably, the degree of capacity expansion will depend on the strength of the demand drivers, and these vary by city (see table 1).

Table 1

We see the development of regulation and other regulatory initiatives in the insurance space as another driver of demand for private healthcare (see table 2). About 38% of the adult population currently accounts for such demand, mostly across the three key regions of Riyadh, Makkah, and the Eastern Province (see chart 5). This leaves more room for growth in underpenetrated areas such as Madinah.

Table 2

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Saudi Private Healthcare: The Story In Charts

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Saudi Private Healthcare: Operational Deep Dive

There is not just one profitability driver

Operating performance trends among publicly listed private healthcare providers in Saudi Arabia depend on a mixed bag of factors, including:

• Cost flexibility, particularly staff costs, and the ability to source an appropriate number of specialist doctors and nurses;
• The availability of specialty services, which, in turn, boosts revenue per patient and ultimately margins; and
• The payor profile, which also plays a role in working capital management.

Profitability margins in the domestic healthcare sector depend on two factors. First, the provider's ability to pass on higher prices to payors, with Ministry of Health and cash payors generally having higher yields. Second, and more importantly, the provision of specialty services, which can translate into higher revenue per patient. Flexibility in the cost profile, particularly the ability to sustain lower-than-average staff costs, is another factor to consider.

We do not view staffing as the main challenge for providers in terms of sustaining profitability. Payor profiles and the degree of service specialization are where divergences occur among publicly listed private healthcare providers. Most of these providers' revenues derive from insurance (see chart 17), where they have limited ability to increase prices.

Healthcare service providers with EBITDA margins between 15% and 25% typically benefit from average profitability, whereas we consider providers with margins exceeding 25% to benefit from above-average profitability (see charts 14-19 and "Sector-Specific Corporate Methodology," published on April 4, 2024).

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The payor profile determines providers' working capital management and overall liquidity

Balancing pricing and working capital is key to providers protecting their liquidity. While Ministry of Health and cash payors generally have higher yields than insurance payors, these come at the price of longer cash-conversion cycles and a higher proportion of short-term debt relative to total debt.

Typically, the Ministry of Health's payment terms are more unfavorable than those of insurers, with a waiting time of about six-to-10 months for collections, compared with less than three months for insurance payors (see charts 20 and 21). We use accounts receivable days for the companies with more exposure to the Ministry of Health as a proxy. A high proportion of short-term debt and working capital delays could easily put pressure on some of these providers' liquidity profiles.

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Funding mostly comes from domestic commercial banks and the government

Most domestic publicly listed private healthcare providers derive funding from the domestic commercial banks, including Islamic banks; the Ministry of Finance; and some government grants. Reliance on external funding is not yet common among private healthcare providers, although earlier this year, Middle East Healthcare Company (not rated) issued a local sukuk to refinance some of its debt.

Reliance on short-term funding is a credit weakness that heightens liquidity risks (see chart 22). That said, we have little doubt that ultimately, providers will receive the payments, especially if the government is the payor. We see the potential for providers to use longer-term external refinancing to meet their growing working capital needs arising from the government's transformation initiatives, as well as to repay their maturing debt (see chart 23).

Saudi banks are well-capitalized. We expect corporates to benefit from the likely decline in interest rates. At the same time, lower funding costs could also increase banks' capacity to support higher lending growth with domestic and external funding sources. Saudi banks continue to display strong asset-quality indicators thanks to their prudent lending practices and significant exposure to low-risk mortgages.

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Credit Quality: What Will Move The Needle?

We expect demand for Saudi private healthcare to remain resilient, benefiting from favorable demographic trends, national transformation initiatives, and developments in the insurance sector. At the same time, we think that payor profile and service specialization will likely determine profitability margins and will be key to working capital management, liquidity, and refinancing needs. Moreover, it is still uncertain whether providers can secure enough funding to meet the 2030 target of 2.7 beds per 1,000 people.

Related Research

• Saudi Arabia Outlook Revised To Positive On Sustained Reform Momentum; 'A/A-1' Ratings Affirmed, Sept. 13, 2024
• Your Three Minutes In Saudi Vision 2030: Credit Implications For Banks And Corporates, May 2, 2024
• GCC Corporate And Infrastructure Outlook 2024: Holding Up Against Refinancing Needs, March 4, 2024
• How Will Saudi Banks Fare In 2024?, Feb. 5, 2024