Skip to content Skip to Search
Skip navigation

Giga-projects squeeze liquidity for Saudi banks

Banner for Vision 2030 project Reuters/Zuhair Al-Traifi
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.

Latest articles

More than 24 million people visited the World Expo event at Expo City Dubai between October 2021 and March 2022

Construction begins at Expo City Dubai site

Construction has begun on the first residential properties at Expo City Dubai, part of a mixed-use master plan to repurpose the legacy site after the world fair came to a close two years ago. Master developer Expo City Dubai announced last week that it has awarded four key contracts for its Mangrove Residences. UAE-based USF […]

Saudi housing costs rose nearly 9% year on year in May

Saudi housing costs rise but inflation remains steady

Housing costs in Saudi Arabia rose nearly 9 percent year on year in May, but it was not enough to push overall inflation in the kingdom over 2 percent. The latest data from the General Authority for Statistics showed the annual inflation rate in Saudi Arabia was 1.6 percent in May, having remained at this […]

OTB Group has a presence in Dubai with its Maison Margiela store in the Dubai Mall

Chalhoub Group in venture with Italian luxury brand

Luxury distributor Chalhoub Group has entered into a joint venture with Italian fashion conglomerate OTB Group to expand the brand’s footprint in the Gulf. OTB (which stands for Only The Brave) owns the Diesel, Jil Sander, Maison Margiela, Marni and Viktor&Rolf brands, the Staff International and Brave Kid companies, and holds a stake in the […]

Arid conditions brought about by the drought in Morocco are affecting the cost of sheep

Drought pushes up sheep price for Eid in Morocco

The price for a sheep in Morocco for the annual sacrifice at Eid al-Adha has increased on average at 10 times the 2.2 percent rate of inflation. A medium-sized female sheep costs MAD4000 ($400) as opposed to MAD3000 last year. This puts it out of range for many families in the country where a high […]