We expect Saudi issuers to continue tapping the global and the local capital markets to finance Saudi Vision 2030. While this appears manageable in the short term, we are keeping an eye on the leverage build-up in the medium-to-long term. We still expect leverage to remain manageable in our base-case scenario, with private-sector debt to GDP staying below the 100% mark in the next 12-24 months.
Saudi companies have led the show until now, but the dynamics are changing. Saudi companies, including government-related entities, account for around two-thirds of U.S. dollar-denominated nongovernmental issuances on average over the past five years, but we expect banks to play a bigger role going forward.
Chart 1
What's Happening
External leverage is building. Saudi issuers, including the government, have raised more than $130 billion in U.S. dollar-denominated issuances over the past five years. This comes on top of the $144 billion that they raised locally in Saudi riyal during the same period, with the implementation of Saudi Vision 2030 explaining part of this flurry. While the government accounts for around 60% of these issuances, Saudi Vision 2030 has also created significant opportunities in the non-oil economy and the banking system.
Why It Matters
Greater recourse to the debt capital markets could increase Saudi issuers' exposure to future market conditions. Fortunately, this is happening at a time when interest rates are reducing and market conditions are supportive. What's more, we expect leverage in the Saudi economy and at the sovereign level to remain manageable, despite a significant increase in investments across different sectors. Saudi Arabia is continuing its substantial and rapid transformation and we foresee an acceleration of investments in the foreseeable future.
What Comes Next
Watch out for the development of the residential mortgage-backed securities (RMBS) market. While we expect Saudi banks and companies to continue to tap international markets to facilitate the implementation of Saudi Vision 2030, one of the key factors to watch over the next one-to-two years is the potential development of an RMBS market in Saudi Arabia.
At the end of September 2024, banks were sitting on more than $175 billion of mortgages that are predominantly at fixed rates and have short-term funding sources, primarily in the form of domestic deposits.
As interest rates drop, some of these mortgages will come into the money again, that is, banks will not incur losses if they sell them in a secondary market. This could allow banks to move the mortgages off their balance sheets. This assumes that the legal hurdles relating to the issuance of RMBS are resolved, or at least the risks are floored at a level that would attract local and international investors' interest.
The RMBS market could give banks significant financial capacity to continue to support Saudi Vision 2030, whether through established infrastructure such as the Saudi Real Estate Refinance Co. (A-/Positive/--) or direct market issuances.
Related Research
- Saudi Arabia Banking Sector Outlook 2025: Vision 2030 Momentum Continues, Jan. 20, 2025
- Sukuk Market: Strong Performance Set To Continue In 2025, Jan. 13, 2025
- Saudi Arabia Outlook Revised To Positive On Sustained Reform Momentum; 'A/A-1' Ratings Affirmed, Sept. 13, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Mohamed Damak, Dubai + 97143727153; mohamed.damak@spglobal.com |
| Secondary Contacts: | Tatjana Lescova, Dubai + 97143727151; tatjana.lescova@spglobal.com |
| Sapna Jagtiani, Dubai +971 (0) 50 100 8825; sapna.jagtiani@spglobal.com | |
| Zahabia S Gupta, Dubai (971) 4-372-7154; zahabia.gupta@spglobal.com | |
| Hina Shoeb, Riyadh + 44 20 7176 3747; hina.shoeb@spglobal.com | |
| Alastair Bigley, London + 44 20 7176 3245; Alastair.Bigley@spglobal.com |
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