Closing Bell: Saudi main index closes in red at 11,671 

RIYADH: Saudi Arabia’s banking sector is set to absorb a rise in external debt, driven by increasing financing demands under the Kingdom’s Vision 2030 agenda, according to a new report.

The analysis by S&P Global Ratings revealed that despite a marked increase in external liabilities over the past three years, Saudi banks remain in a strong position to manage associated risks.

The uptick in debt is primarily linked to short-term instruments, such as interbank and non-resident deposits, as well as bond issuances on international capital markets.

In 2024, Saudi banks extended loans worth SR371.8 billion ($100 billion), while deposits grew by only SR218.9 billion, creating a funding gap of SR152.9 billion to be refinanced.

S&P estimates that by the end of 2028, net external debt will account for only 4.1 percent of total lending, a manageable level by industry standards.

“More recently, banks have increasingly tapped international capital markets for funding as local sources proved insufficient to meet the country’s ambitious requirements, as set out in the state’s Saudi Vision 2030 development program, and the expected growth in corporate financing requirements,” the study stated.

The Kingdom’s lenders, which until recently maintained a net external asset position, posted a net external debt of SR34 billion by the end of 2024. S&P expects foreign liabilities to almost double over the next three years.

Saudi banks’ external funding remains heavily skewed toward interbank deposits and repurchase agreements, accounting for 55 percent of the increase in gross external debt last year.

Notably, 59 percent of all external debt in 2024 was owed to foreign banks, raising concerns over volatility, given the short-term nature of such funding.

Despite this, the report noted that nearly half of these foreign deposits originate from within the Gulf Cooperation Council, where banking systems are flush with liquidity.

This regional funding base, coupled with Saudi Arabia’s proven record of state support, is expected to cushion any potential shocks.

“We view Saudi authorities as highly supportive of the banking system and expect extraordinary support will be forthcoming should the need arise,” the analysis stated.

The agency also dismissed direct comparisons with Qatar, whose banking sector experienced a sharp rise in external debt during its infrastructure build-up for the 2022 FIFA World Cup.

At its peak, Qatar’s net banking external debt reached 40.6 percent of domestic loans at the end of 2021.

As of end-2024, Saudi banks held gross external debt of $109.5 billion, nearly “quadruple” its $29.5 billion at the end of 2018.

Yet the country’s total banking assets are almost double those of Qatar, helping to absorb the increase in debt.

In parallel with external funding, Saudi banks are exploring ways to unlock balance sheet capacity through mortgage asset sales.

The Saudi Real Estate Refinance Co. had acquired SR28.8 billion in home loans by the end of 2024, while discussions around mortgage-backed securities remain ongoing.

Despite holding mortgage portfolios worth $180 billion, or 23 percent of total lending, banks have been cautious about divestment.

Factors include favorable profitability, past losses due to higher interest rates, and investor hesitation around default recovery mechanisms in the Kingdom.

However, S&P predicts that a local market for residential mortgage-backed securities will gradually emerge, supporting further liquidity creation.

The report concludes that while external debt will continue to grow in the short term, Saudi banks retain ample headroom to navigate the risks, thanks to strong fundamentals, sovereign backing, and a measured approach to financial innovation.

RIYADH: Gulf Cooperation Council countries accounted for over 35 percent of all emerging-market US dollar debt issued in the first quarter of the year— excluding China— marking a sharp increase from around 25 percent in 2024, a new report revealed. 

In its latest analysis, Fitch Ratings forecast that the share is expected to continue rising through 2025 and 2026 as regional governments and corporations increasingly turn to debt capital markets for funding diversification, project finance, and budget support amid fiscal pressures and global economic uncertainty. 

The report stated that the total value of the GCC DCM exceeded $1 trillion across all currencies by the end of the first quarter, marking a 10 percent year-on-year increase.

Issuance reached $89 billion in the first three months of the year, up 11 percent from the previous quarter but down 3 percent compared to the same period of 2024. 

Despite a slowdown in activity since early April, Fitch noted “a healthy pipeline” is developing, supported by strong regional and Islamic investor liquidity. 

“The GCC DCM continues to be fragmented among its six member countries in its maturity, depth, and credit profile, with Saudi Arabia and the UAE the most mature,” the report stated. 

“In Kuwait, Qatar, Bahrain, and Oman, the lack of a link with international central securities depositories such as Euroclear or Clearstream partly hinders foreign-investor participation in the local-currency DCMs,” it added. 

According to the global investment banking firm State Street Global Advisors, other regions saw divergent trends. Brazil led the emerging market in local bond returns with a 13.7 percent gain, driven by currency appreciation and rate hikes. 

In contrast, Turkiye posted an 8.7 percent decline, reflecting political instability and currency depreciation. These shifts underscore varying macroeconomic dynamics across emerging markets. 

In the Kingdom, foreign investors increased their participation in local government debt, accounting for 7.7 percent of the investor base at the end of the first quarter of the year, up from 4.5 percent in 2024. 

Fitch noted that pressure from declining oil prices — forecast at $65 per barrel for 2025 and 2026 due to OPEC+ cuts and trade-related volatility — could widen fiscal deficits and lead to increased borrowing. 

Among the most vulnerable are Bahrain and Saudi Arabia, while Qatar, Kuwait and Abu Dhabi benefit from substantial sovereign wealth assets. Oman is seen as relatively well-positioned fiscally. 

Interest rate expectations are also playing a role in shaping the DCM outlook. Fitch projects the US Federal Reserve to lower rates to 4.25 percent by end of 2025, with GCC central banks expected to follow suit. 

Lower rates could support further issuance, as banks and corporates across the region continue to diversify their funding strategies. 

Sukuk remains a cornerstone of the GCC’s DCM, comprising around 40 percent of the total outstanding by the first quarter of the year. 

The region holds over 40 percent of the global sukuk market, though issuance fell 51 percent year on year in the first quarter to $18.2 billion. 

Conventional bonds rose 29 percent over the same period. Fitch reported that 83.5 percent of Fitch-rated GCC US dollar sukuk are investment-grade, with 57.8 percent in the “A” category and the majority holding stable outlooks. 

Environmental, social and governance financing is also gaining traction in the region, with GCC countries’ ESG DCM surpassing $50 billion in all currencies by the end of the quarter. 

National-level regulatory reforms are also reshaping local markets. In Kuwait, the cabinet’s approval of a long-delayed financing and liquidity law is expected to unlock new borrowing capacity. 

In the UAE, the apex bank continues to advance the Dirham Monetary Framework, with the currency’s share in the domestic DCM growing to 24.9 percent from just 0.5 percent in 2020. 

Sustainable finance is also gaining momentum, with the UAE developing a Sustainable Islamic M-Bills program and Qatar unveiling a sustainable finance framework. 

Despite global uncertainty, Fitch emphasized the resilience of the region’s credit quality, noting that no Fitch-rated GCC sukuk or bonds defaulted in 2024 or the first quarter of 2025.