Capital markets will have to plug growing investment gap in Saudi Arabia, S&P says

Banks will be unable to finance funding needs of kingdom's mega development projects as it continues to diversify its economy

The Line at Neom. PIF is the main backer of $500 billion mega city. Photo: Neom

Banks will be unable to meet the investment funding needs of Saudi Arabia’s corporate sector and capital markets will have to play a key role in bridging the financing gap as the kingdom continues to roll out new development projects.

The government’s plans to develop mega projects across sectors and its investment commitments due to an increase in oil revenue means investment needs in the kingdom are significant and growing, S&P Global Ratings said in a note on Wednesday.

Spending plans of the kingdom’s private sector are also driving the financing needs and banks, despite their strong capitalisation levels, will not be able to meet all the requirements.

“We anticipate Vision 2030 will drive the fiscal outlook for Saudi Arabia with PIF [Public Investment Fund] and other government agencies setting the pace of investment, followed by private local companies,” S&P said.

“Investment will likely remain fairly high as a percentage of gross domestic product”, reaching about 24 per cent of GDP in the second quarter of this year, the rating agency said.

Saudi Arabia, the world's biggest oil exporter, is rapidly transforming its economy as it aims to reduce its dependence on the sale of hydrocarbons for revenue.

The country's economy, which bounced back strongly from the pandemic-driven slowdown last year, has picked up further growth momentum in 2022.

Saudi Arabia's economic output expanded by 8.6 per cent in the third quarter of 2022, driven by higher oil prices and government reforms, up from 6.8 per cent growth recorded a year ago, according to General Authority for Statistics data.

The International Monetary Fund expects the Saudi economy to grow by 7.6 per cent this year, more than double the 3.2 per cent growth last year.

Boosting jobs, carving new income streams, developing the housing and tourism sectors and broadening the country’s industrial base are the main planks of the kingdom’s Vision 2030.

PIF, the kingdom’s main sovereign wealth fund, is at the heart of Riyadh’s economic transformation agenda.

The fund, with more than $620 billion in assets, has rolled out giga projects across sectors including the $500 billion futuristic city, Neom.

Other projects include a nature reserve, coral reefs and heritage sites on several islands along the Red Sea, and Qiddiya, a vast entertainment and sports project in Riyadh.

The Red Sea Development Company is also building a mega-tourism project on Saudi Arabia’s west coast.

Under its five-year strategy announced last year, the PIF aims to more than double the value of its assets under management to $1.07 trillion. It is committing $40 billion annually to develop Saudi Arabia's economy until 2025, by investing across 13 sectors as part of its core domestic strategy.

Earlier this week, PIF secured a $17 billion, seven-year senior unsecured term loan to diversify its debt funding sources.

On Wednesday, Saudi Entertainment Ventures, a PIF unit, said it planned to invest 50 billion Saudi riyals ($13.3 billion) to develop 21 integrated entertainment destinations in 14 cities in the kingdom.

With accelerating pace of development in the kingdom, gauging exact funding requirements and its timing is not easy, S&P said.

“These 2030 targets are ambitious. Even if they are not fully met, we expect the country will make some progress,” the rating agency said.

S&P expects increased deal activity on Saudi Arabia’s debt capital market and growing equity transactions, particularly as more government-related entities are listed on the stock exchange.

“The capital markets will play a key role in funding not just private sector investments but also giga-projects such as Neom, the IPO [initial public offering] for which is expected in 2024,” S&P said.