Saudi giga-projects may tap into debt market funding

Balkis Press/Abaca via Reuters Connect

• Bank sector and PIF cannot alone fund Vision 2030
• S&P Global expects capital markets to play a part
• Contracts were worth $24.6bn in 2022

Saudi Arabia’s vast pipeline of giga-projects will require funding assistance due to the tightened liquidity in the country’s banking sector, say analysts at credit rating firm S&P Global.

This, they add, opens opportunities for the Gulf’s debt markets.

“We think that the Public Investment Fund and Saudi’s banking sector alone won’t be able to fund all the required investments for Vision 2030 and so it will fall on the debt capital markets to support a large proportion of projects,” said Mohamed Damak, senior director of financial institutions ratings at S&P.

“We expect a lot more debt capital market activity relating to Saudi over the next two to three years.”  

• Saudi public-private partnerships worth billions
• Saudi tourism appeal growing ‘at the speed of light’
• Value of Saudi project contracts doubled to $24.6bn in 2022

Damak noted that credit growth has outstripped deposit growth, which in turn has reduced the availability of liquidity in the kingdom’s banks.

S&P has forecast that credit growth will slow to 10-12 percent in 2023-2024, owing to higher interest rates and tighter liquidity.

“The massive number of projects looking for long term financing has created more strain for the banks,” Sofia Bensaid, associate director of infrastructure ratings at S&P, said.

“Hence this is translating to higher lending rates on Saudi loans. Therefore, we see the capital markets as extremely important for infrastructure and project finance funding.”

Increased credit demand is being fuelled by the kingdom’s ramping up of activity, in a bid to achieve its Vision 2030 economic diversification goals.

The value of giga-project-related contracts awarded in Saudi Arabia in 2022 grew by 103 percent to $24.6 billion from $12 billion the previous year.

A combined $110 billion worth of contracts are expected to be awarded in the GCC this year, with Saudi Arabia accounting for more than half of the total. The kingdom makes up $64 billion of the combined value, according to Middle East data provider Meed Projects’ 2023 outlook. 

Bensaid added that capital markets are also of increasing importance to Saudi giga-projects and other GCC infrastructure schemes.

“There are a massive number of operational infrastructure projects in the region right now – especially relating to power, water and wastewater treatment plants – that are looking for bond refinancing,” she said, adding that there are at least 15 regional projects that are currently waiting for the right time to go to market.