Banking & Finance

Giga-projects squeeze liquidity for Saudi banks

January 3, 2024

Banner for Vision 2030 project — Financing Saudi Arabia's colossal Vision 2030 projects is triggering a liquidity squeeze in the mid-market banking sector, a senior banker has warned

Mid-market being hit
Opportunity for private credit
Openings in receivables financing

Banks in Saudi Arabia are being pushed to finance the kingdom’s colossal Vision 2030 projects, triggering a liquidity squeeze in the mid-market sector and creating demand for private credit, a senior executive at Rothschild & Co told a conference in Abu Dhabi

Private credit refers to non-bank lending, where investors provide debt financing directly to private companies.

Saudi Arabia’s Vision 2030 economic transformation, which is designed to end the kingdom’s dependence on fossil fuels, requires $100 billion of foreign direct investment (FDI) inflows annually by 2030. However, in 2022 the kingdom only managed $33 billion.

“Banks are being forced to lend en masse to support Vision 2030,” Naveen Bhojwani, managing director of debt advisory, restructuring and special situations for emerging markets at Rothschild & Co, told Abu Dhabi Finance Week.

“With local banks in Saudi Arabia looking at and being very focused on these opportunities, that’s drying up liquidity for the mid-market.”

He said that while many of the upcoming projects are backed by the Ministry of Finance or the Public Investment Fund (PIF), providing a level of security, their current structuring has not been “too palatable” for international lenders.

Bhojwani emphasised, however, that despite the Saudi mid-market liquidity squeeze, the macro position for Gulf states, especially the UAE and Saudi Arabia, remains robust.

Pockets of stress

He said that rising interest rates have not been “a trigger for restructurings” in the region so far.

“I think that will likely have a greater impact in time,” Bhojwani said.

“But we are seeing pockets of stress. It’s going to be more difficult for corporates coming to refinance over the next 12 to 18 months, particularly on the mid-market side. That blends significant opportunity for private credit.”

Andrew Cunningham, a risk and governance consultant for the Middle East and sharia-compliant banking systems, said in an AGBI column that Saudi Arabia’s Ministry of Finance is predicting that the kingdom will continue to record budget deficits in the years ahead as a result of increased spending on giga-projects and infrastructure development.

The 2024 budget statement estimates that the deficit for 2023 will be $22 billion, rather than the surplus of $4 billion that was being predicted last year.

The ministry is predicting annual deficits of between $20 billion and $30 billion over the next three years.

Rothschild & Co’s Bhojwani said that banks in Saudi Arabia were also being compelled to increase their mortgage portfolios, further squeezing liquidity.

Saudi banks’ mortgage lending to individuals and businesses rose in the third quarter, with central bank figures showing mortgage lending was up 13 percent year on year, despite a slowdown caused by lower oil prices and oil output cuts.

The completion of the latest SAR3.5 billion sukuk issuance by the PIF-owned Saudi Real Estate Refinance Company exemplifies this trend.

Sukuk were developed as an alternative to conventional bonds which are not considered permissible by many Muslims as they pay interest, and also may finance businesses involved in activities not allowed under sharia law.

Systemic risks

Bhojwani said local banks were purchasing mortgages and repackaging them into bonds, creating potential systemic risks.

However, he said, there were opportunities in receivable-based financing, with lengthy payment terms in contracts with highly creditworthy ministries.

“We often see very interesting projects with good quality contracting firms with contracts with very strong creditworthy ministries, but receivable days go north of 350 to 400 days,” Bhojwani said.

“These types of situations remain extremely interesting.”

The total value of ongoing projects in Saudi Arabia was $1.487 trillion at the end of October, according to the Saudi Contractors Authority.

The real estate consultancy Knight Frank described the kingdom as “the biggest construction site the world has ever seen”.

In December, Saudi Arabia arranged an $11 billion syndicated loan to help fund its infrastructure developments, the largest government loan worldwide this year.