Saudi Arabian financial institutions are poised to potentially issue an unprecedented volume of bonds this year as a liquidity challenge intensifies, with the nation’s grand economic reform plans under the spotlight.
Analysts project that the demand for funds to fuel Vision 2030 – the ambitious blueprint to diversify the kingdom’s oil-dependent economy – could see banks issuing bonds in excess of $11.5 billion in both local and international currencies. This figure would eclipse the $10 billion raised in 2022, marking a new zenith in the country’s debt market history.
The scale of investment required for marquee projects like the futuristic city Neom and the entertainment hub Qiddiya is immense. Banks in Saudi Arabia are facing slower deposit growth and a shortfall in foreign capital inflows. This has led experts, including those from Jadwa Investment Co. based in Riyadh, to conclude that borrowing will be a significant source of funding for these developments.
"The one issue which I think is the most troubling for the whole Vision 2030 project is the lack of capital," commented a former chief economist at Jadwa, now employed by Saudi Arabia’s sovereign wealth fund, emphasizing the pressure on the Saudi banking system.
As the kingdom’s banks struggle with diminishing liquidity – a consequence of loan growth outpacing deposits – they face the gargantuan task of financing a projected $640 billion in construction over the next half-decade. If banks are to cover around 60% of this sum, they’ll need to muster nearly $384 billion, combining increased deposits and debt.
Despite the reliance on deposits as the primary funding mechanism, debt issuance is expected to play a significant role, potentially accounting for 15% of the necessary capital, as per Edmond Christou, a senior analyst at Bloomberg Intelligence. This translates to an annual issuance of roughly $11.5 billion.
An uptick in debt market activity is already observable, with approximately $6.8 billion in bonds sold thus far this year, an amount that surpasses the total for the previous year.
Fortunately, Saudi banks maintain robust balance sheets, with S&P Global Ratings assigning most of them an investment-grade status. The central government and affiliated entities also contribute substantial financing to the Vision 2030 initiatives. The affluent Public Investment Fund plans to inject $70 billion annually post-2025 and is exploring its own fundraising avenues.
While Saudi Arabia’s Finance Minister has hinted at potential delays in certain Vision 2030 projects, the necessity for substantial financing remains. Amwal Capital Partners anticipates bond issuances by the government and state enterprises, including further offerings from the Public Investment Fund.
These financial maneuvers are crucial as the kingdom seeks to mitigate the fiscal impact of less than optimal oil prices, which have created a significant revenue gap. To balance its budget, Saudi Arabia requires oil prices to be above $90 per barrel, a figure that rises to $108 when including domestic expenditures by the wealth fund.
Signs of easing liquidity strains have emerged since the year’s commencement, providing banks with a modicum of relief. The Saibor, a critical borrowing cost indicator, has receded from its peak earlier in the year, and central bank deposits at domestic lenders have seen an increase, offering a more comfortable cushion for loan coverage.
"It’s important to remember that the scale of financing required is substantial," noted Samer Jumean, partner and head of infrastructure at KPMG in Saudi Arabia. "Liquidity isn’t going to dry up but it’s the right thing to do to start tapping the capital markets."