Saudi Arabian Banks Gear Up for Record Debt Issuance Amid Economic Transformation Drive

In a remarkable turn of events, financial institutions across Saudi Arabia brace themselves to undertake what may be a historic scale of debt issuance this year. The thrust for this unprecedented borrowing arises from a tightened liquidity condition that poses a challenge to Crown Prince Mohammed bin Salman's ambitious, multi-trillion-dollar economic diversification plan known as Vision 2030. The transformative initiative aims to pivot the nation's fundamental economic reliance away from petroleum and towards diversifying income streams across various sectors, including tourism and technology.

Saudi Arabian Banks Seek Record Debt

Anticipated Surge in Bond Issuance

Market experts from Bloomberg Intelligence project that Saudi banks may solicit at least $11.5 billion in bonds denominated in both local and international currencies this year. This potential record-setting sum would eclipse the $10 billion amassed in 2022, marking a new zenith for the domestic financial industry.

Financial entities in the kingdom are anticipating the need to source substantial funds to fuel considerable initiatives such as the futuristic urban hub Neom and the lavish entertainment complex Qiddiya. These mega projects underscore the sheer magnitude of investment required. However, the trajectory of deposit growth at Saudi banks has been modest, and foreign capital inflow into the nation has been limited. Consequently, institutions are anticipated to substantially depend on debt as a means of funding these expansive undertakings.

"The most vexing issue confronting Vision 2030 is the dearth of capital," stated James Reeve, former chief economist at Jadwa Investment Co. who has recently joined Saudi Arabia's sovereign wealth fund. "The Saudi banking system is nearing its limits in terms of capacity to extend further credit."

The Liquidity Squeeze and Construction Boom

Amidst an economic contraction last year, Saudi Arabian banks contended with an increasingly tight liquidity situation. Loans expanded in an effort to bolster the domestic economy, yet eclipsed the pace of deposit growth. Within the next five years, the country is poised to require an astounding $640 billion for construction-related expenditures, as indicated by MEED Projects, a Dubai-based analytics firm.

In this context, banks are speculated to fund up to 60% of the project pipeline, effectively necessitating a staggering $384 billion. This effort would incorporate a strategic combination of new deposits and debts to attain this goal, further intensifying the pressure on the banking sector.

Deposit Growth and Debt Financing

Saudi Arabian banks continue to rely fundamentally on deposit growth as their main source of funding. Edmond Christou, a senior financials analyst at Bloomberg Intelligence, believes banks could finance an estimated 15% of their needs through debt issuance. This implies an emergent necessity for new bond offerings amounting to roughly $11.5 billion annually.

"The banking sector lacks the liquidity to satisfy the demands for construction, but banks will be amassing more deposits and engaging with the international debt market," Christou articulated from Dubai.

Accelerated Movements on the Debt Front

There is already tangible evidence of this debt issuance momentum. As of this year, approximately $6.8 billion in bonds have been issued by Saudi banks, as per data from Bloomberg Intelligence. This figure significantly surpasses the $5.4 billion released by local lenders for the entire preceding year.

In spite of these substantial financial demands, the fiscal condition of Saudi banks remains robust. Most primary lenders maintain an investment-grade rating with a stable forecast by S&P Global Ratings. Notably, these banks are not expected to shoulder the entire financial load necessary for Vision 2030's realization.

Government and Central Funding Involvement

The Saudi government and associated entities are also slated to contribute significantly to project financing. The Public Investment Fund is poised to allocate approximately $70 billion annually past 2025 and is currently contemplating its own fundraising strategies.

Amwal Capital Partners predict that along with the national government, state enterprises, and other entities will partake in bond issuance. The firm's partner and co-head of fixed income, Zeina Rizk, predicts another $3 billion to come from the PIF.

Economic Challenges and Oil Dependency

The kingdom's economy still grapples with the unpredictability of the oil market, which continues to have profound implications for its financial robustness. A steep drop in oil export revenues, plummeting by nearly $80 billion to $248 billion last year, has unequivocally dragged the national budget back into a deficit, underscoring the nation's dependence on high energy prices for economic stability.