Saudi Vision 2030, which will require around $1 trillion in investments over several years, will inevitably increase leverage in the Saudi private sector and the broader economy, albeit from low levels, according to S&P Global Ratings.

 

"Part of the $1 trillion in investments will come directly from the government and the Public Investment Fund, but we also expect banks and capital markets to contribute a significant amount," said S&P Global Ratings credit analyst Zeina Nasreddine.

 

"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," Nasreddine added.

 

Lending growth

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 lending growth has not translated 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, S&P expects 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 capitalisation overall. 

 

S&P expects banks' sound profitability and conservative dividend payouts to continue supporting their capitalisation 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

S&P will continue to monitor debt buildup in the Saudi economy. However, it expects it to be gradual, and potentially concentrated in some companies within the Public Investment Fund portfolio. S&P expects 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. This is why S&P expects the increase in leverage to be gradual.--TradeArabia News Service