Saudi Arabia’s debt capital market is set to take on a larger role in financing Vision 2030, the Gulf kingdom’s plan to transform and diversify its economy and grow the private sector, according to S&P Global Ratings.
The ratings agency said in a new research note that authorities aim to deepen their debt and equity markets to increase foreign direct investment.
The strategy also entails investments by the government and its related entities as well as the private sector of about SR12 trillion ($3.2 trillion) by 2030.
“We think banks will continue to play an important role in financing Vision 2030, but foresee an increased role for the local capital market,” S&P said.
It said it believes an increased amount of the funding will be pushed onto the balance sheets of government-related entities and broader private sector.
“While the US dollar will continue to be the currency of choice for issuance in Saudi Arabia, we expect to see gradually greater use of Saudi Arabian riyal-denominated issuance as the local market develops,” said S&P Global Ratings credit analyst Mohamed Damak.
S&P’s note said the currency peg between the US dollar and the riyal could help attract foreign investors actively hunting for yield in an environment of low interest rates.
A gradual deepening of the local capital market would likely increase levels of transparency and could reinforce governance practices in Saudi Arabia in coming years, it added.
Saudi Arabia has one of the world’s largest economies, with GDP of about $700 billion at year-end 2020, and is the world’s largest oil exporter.
Of the Gulf Cooperation Council members, it has the largest population of about 33 million – 60 percent of which are local nationals – at year-end 2020.
Over the past decade, the Capital Markets Authority (CMA), the country’s capital markets regulator, has undertaken several measures to develop its equity and debt capital markets and attract foreign investors.
For example,there were several initiatives to improve the infrastructure and trading rules of Tadawul, the country’s stock exchange, to increase market access for investors.
“We have also seen a visible increase in listed debt issuances by Saudi corporates, particularly government-related entities, which represented about 90 percent of the about $26 billion listed corporate bond and sukuk issuance in 2019 and 2020,” said S&P.
When oil prices dropped sharply beginning in the second half of 2014, the Saudi government balance fell into deficit, requiring a broadening of its funding options and a move away from depleting its assets.
As a result, the Saudi Debt Management Office was set up in 2015, and between 2015 and 2020 the government issued over $200 billion of bonds and sukuk. As a result, debt outstanding has increased sharply, with S&P forecasting that gross debt will rise to about 46 percent of GDP by 2023, up from 20 percent in 2019 and close to zero in 2014.
Nevertheless, non-sovereign debt capital markets in Saudi Arabia remain underdeveloped relative to other key markets globally, the agency added.
Over the next few years, S&P said it expects the government to allocate part of spending to a series of large projects under Vision 2030 and away from the oil sector.
The Public Investment Fund (PIF) will play a particular role in supporting and funding a certain level of capital expenditure to create direct and indirect jobs through investments in 13 strategic sectors including aerospace and defence, tourism and entertainment, health care, renewables, mining, and transportation.
Given the sheer size and the long-term nature of investments under the 2030 program, the banking sector alone will be unable to fill the need.
“We therefore expect a significant portion of the funds to come from the capital market, leading to a progressive rebalancing of the country’s financial system and development of a broader local capital market,” said S&P.
“Greater issuance by the Saudi sovereign will attract more attention from investors, particularly given their search for higher-yielding investments in an era of low interest rates. On the corporate debt market, we expect large government-related entities to be the main issuers at first, followed by a few top corporates, rather than a general movement to the capital markets,” it added.
The report also said Saudi Arabia’s energy transition and transformation of its economy to a more sustainable one should also improve Saudi issuers’ standing in terms of environmental, social, and governance (ESG) considerations.
“We expect to see a higher volume of sustainable funding in the next few years to finance the needs created by Vision 2030. We also think that greater involvement by foreign investors will likely strengthen corporate governance practices in the country,” it noted.
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