S&P: Bank Credit in Saudi Arabia Supports Vision 2030, External Debt Constitutes 1%

Standard & Poor’s confirmed that 70% of bank credit growth in Saudi Arabia over the past two years was driven by corporate lending, which is closely linked to the achievement of Vision 2030. Zeina Nasreddine, Financial Services Advisor at the agency, explained that loan growth has outpaced deposit growth over the past four years, resulting in a loan-to-deposit ratio exceeding 100%, prompting banks to borrow abroad to support domestic financing operations. Despite this shift, Nasreddine confirmed that external debt still represents a low percentage of no more than 1%, with expectations that it will not exceed 5% over the next two to three years.

During a discussion session on credit outlook in Saudi Arabia organized by Standard & Poor’s, Nasreddine indicated that comparing the Saudi experience with other countries, such as Qatar during its preparations for the 2022 World Cup, it is clear that the size of external debt in Saudi Arabia is much lower. She added that growth in the Kingdom is primarily focused on lending to companies and individuals, particularly in the mortgage sector, and banks are expected to continue borrowing abroad to support deposit growth and refinance their liabilities. She also expected the potential expansion of the secondary mortgage market to improve the structure of banks’ balance sheets, enabling them to provide new loans that support the achievement of the goals of Vision 2030.

For her part, Zohra Gupta, Associate Director of Sovereign Debt Ratings at Standard & Poor’s, said that Saudi Arabia’s credit rating has seen significant improvement in recent years, with the Kingdom’s sovereign rating being upgraded by one notch in 2023. This reflects improved economic growth prospects, enhanced institutional reforms, and the expansion of domestic capital markets.

Gupta added that Saudi Arabia had been rated AA- for a long time, but with the decline in oil prices in 2014, the fiscal deficit rose to 16% of GDP during 2015-2016, leading to a three-notch rating downgrade to A-. However, structural economic reforms and the expansion of non-oil investments have improved the outlook for the Saudi economy.

She emphasized that oil still accounts for 30% of Saudi GDP, but efforts to diversify the economy are driving growth in the tourism, renewable energy, and manufacturing sectors. Despite the challenges, the fiscal deficit is expected to rise to more than 4% over the next four years, compared to 2.8% in 2024, as a result of lower oil revenues and increased spending on major projects.

Regarding global markets, Gupta emphasized that Saudi Arabia is capable of managing the transformations in the energy sector thanks to its vast reserves and low production costs, in addition to increasing investments in mining, financial services, and infrastructure. She also expected the credit rating to remain stable as long as the government continues to achieve sustainable growth in the non-oil sector, promote foreign investment, and reduce the fiscal deficit. Dr. Mohamed Damak, Managing Director and Head of Islamic Finance at Standard & Poor’s, noted that Saudi banks have begun expanding their external debt base, resulting in a shift in their net external asset position to a deficit of $9 billion in 2024, compared to previous surpluses. However, Damak emphasized that this does not pose significant risks to the banks’ stability.

He added that one of the tools that could help strengthen the mortgage finance market or real estate securitization, as there is significant potential for developing the mortgage-backed securities market, is expected to improve these conditions, potentially leading to the development of a strong secondary mortgage financing market, enhancing banks’ ability to refinance their real estate portfolios more efficiently.

Regarding the future direction of the Saudi economy, Damak emphasized that dependence on oil is gradually declining, but it still represents more than 60% of government revenues. With oil prices falling to $70 per barrel and this impacting Aramco’s dividends, the fiscal deficit is expected to rise to more than 4% of GDP in the coming years.

He pointed out that the Kingdom is investing in infrastructure and major projects, such as NEOM and Expo 2030, which are boosting growth in the tourism, financial services, renewable energy, and mining sectors. However, sustaining this growth requires enhancing private sector participation and attracting more foreign investment.

Saudi banks are restructuring their financing strategies by converting some loans into securitization instruments, which helps them free up their balance sheets to finance new projects. With the improvement of the legal and regulatory framework, we may see an expansion in the use of real estate-backed securities.

He emphasized that external debt rates remain relatively low and are not expected to rise excessively, as has happened in some other countries during major development phases. However, Saudi banks must develop more sustainable financing models to avoid overreliance on external borrowing.

The speakers emphasized that the Saudi economy is on a positive path toward diversification and reducing its dependence on oil, with the continued improvement of the investment environment and the implementation of mega projects that support Vision 2030. However, managing financial risks, promoting sustainable financing, and supporting the mortgage market will be key factors in maintaining long-term economic stability.

Standard & Poor’s (S&P) upgraded the Kingdom’s credit rating in local and foreign currencies this week to “A+” with a “stable” outlook. The agency explained in its report that the upgrade of the Kingdom’s credit rating, with a stable outlook, comes as a result of the Kingdom’s continued progress in economic diversification and the growing growth of the non-oil sector in the Kingdom.

The agency also commended the Kingdom’s move to stimulate investment, which will boost non-oil sector growth and enhance the economy’s resilience in the medium term. As a result, Standard & Poor’s expects real GDP growth to average 4% during the period 2025-2028. The agency also forecasts the state’s general budget deficit to average 4.2% of GDP during the same period, due to transformational spending that contributes to driving economic diversification. It also expects the Kingdom to maintain a healthy net foreign asset position.