RIYADH: As Saudi Arabia’s financial system turns increasingly to debt markets for funding, it will face new opportunities and increased risk in relation to its stability and resilience, experts told Arab News.

The growth of sukuk issuance and other debt market activities are essential to the Kingdom’s economic diversification targets and objectives set out in the Vision 2030 initiative.

Saudi Arabia raised SR2.64 billion ($704 million) through sukuk issuances in March, following the SR3.07 billion secured in February and SR3.72 billion in January. 

A report by Fitch Ratings in February showed that the Kingdom holds the largest share of the Gulf Cooperation Council’s debt capital market — which itself surpassed the $1 trillion milestone at the end of January.

This represented a 10 percent year-on-year growth across all currencies. 

Another report by Fitch earlier this year showed that Saudi Arabia became the largest dollar-denominated debt issuer in emerging markets  — outside China — and the world’s largest sukuk issuer in 2024. 

The Kingdom’s debt capital market grew by 20 percent year on year in 2024, reaching $432.5 billion in outstanding debt.

Funding uses

Saudi Arabia uses sukuk issuance as a mechanism to finance giga-projects such as NEOM, the Red Sea, and Qiddiya, which collectively require hundreds of billions of dollars in funding.

Ian Khan, a technology futurist and author, said this highlights the Kingdom’s commitment to Islamic finance as a driver of sustainable development.

“Sukuk aligns with Vision 2030 by attracting both domestic and international ethical investors, particularly from markets in Southeast Asia, the Middle East, and North Africa. Additionally, sukuk’s structure, which ties returns to tangible assets, ensures that funds are channeled into real economic activities such as renewable energy, infrastructure, and technology, all of which are cornerstones of Saudi Arabia’s diversification agenda,” Khan said.

“Furthermore, by developing its domestic sukuk market, the Kingdom reduces its dependence on oil revenues, which currently account for over 50 percent of GDP,” he said.

Khan emphasized that sukuk also supports green finance initiatives, with Saudi entities already issuing green sukuk to fund renewable projects such as the 300 MW Sakaka Solar Project.

Risks and rewards

According to Mohammad Nikkar, principal at Arthur D. Little Middle East, reports published by the Kingdom’s central bank highlight the capitalization strength of the Saudi banking system.

“However, an overreliance on external funding such as debt markets could potentially weaken the credit quality of the banking system, highlighting the need for more prudent risk management,” he said.

There is no doubt that as the focus shifts toward debt markets, new dynamics and opportunities emerge.

“As the sector progresses toward 2030 and beyond, the increasing reliance on debt markets necessitates continued regulatory vigilance and the implementation of robust risk management practices to maintain overall stability and resilience,” Nikkar said.

Khan said that the Kingdom’s sovereign bond issuances have been met with strong global demand, with oversubscriptions often exceeding several billion dollars, reflecting investor confidence in the country’s economic reforms.

“However, the increasing exposure to external debt introduces risks, particularly if global interest rates rise or oil revenues fluctuate significantly,” he said.

The author went on to emphasize that to address these challenges, the Saudi Central Bank is likely to strengthen regulatory frameworks and risk buffers, ensuring that banks maintain adequate capital and manage foreign currency risks effectively.

According to Edmond Christou and Basel Al-Waqayan, analysts at Bloomberg Intelligence, the increasing reliance on debt markets will improve the resilience of Saudi Arabia’s banking sector by diversifying funding sources and providing more stable capital to support long-term project financing.

“With banks managing significant duration and liquidity risks, stable funding is critical for driving growth in key sectors aligned with Vision 2030. Senior unsecured paper, for instance, are issued at an average spread of 90 basis points above benchmark treasuries, while subordinated AT1 bonds range between 150–200 basis points,” the analysts told Arab News in a joint statement.

“In 2024, Saudi banks raised approximately $11.5 billion in debt markets, and they are on track to exceed that figure as they continue to finance major projects,” they added.

Martin Blechta, partner at Boston Consulting Group, explained that some of the largest and most recent issuances were done by AlRajhi Bank, Riyad Bank, and Banque Saudi Fransi, as well as Arab National Bank, Saudi Investment Bank, and Gulf International Bank, among others. For some, this was a first-time issuance.

“The increasing reliance on the debt market is an expected progression of the banking sector overall and very much on the strategic agenda of the Saudi Capital Market Authority aiming to expand the debt instrument market,” Blechta said. 

“Additional Tier 1 capital plays an important role in the capital structure of leading international banks and the recent developments in the Saudi banking sector are very much in line with that.” 

Vision 2030 alignment

From ADL’s point of view, Nikkar explained that by fostering a robust debt capital market, the Kingdom enables growth of alternative sources of funding — a pillar of its National Investment Strategy and aligned with Pillar 1 of the Financial Services Development Program.

The ADL partner added: “This expansion not only opens the country to more investments from international investors but also provides new opportunities for domestic investors to participate in the investment drive fueled by the country’s unprecedented infrastructure and flagship projects within Vision 2030.”

Christou and Al-Waqayan from Bloomberg Intelligence argued that growing focus on sukuk issuance and debt market activities is pivotal to support Saudi Vision 2030’s objectives of economic diversification and sustainable growth.

“A deeper and more developed local capital market attracts foreign investment flows, which are critical to supporting the Kingdom’s expanding economy. Initiatives such as last year’s Saudi ETF listing in Hong Kong and China, as well as the Lenovo deal are key to attract international capital,” the analysts said.

Blechta from BCG noted that banks are diversifying funding sources to match the changing nature of government and large corporate financing needs.

“The majority of large-scale projects are in need of very long-term debt that is typically USD-denominated, to increase international investor demand. Banks are accordingly matching this demand on their funding side. Interestingly, most recent Saudi bank debt issuances were heavily oversubscribed, which shows strong investor confidence in the Saudi banking sector overall,” the partner said.

“However, most demand for the SAR denomination was still domestic, while the USD titles have seen more international investor uptake,” he added.

Transformative effects on the Kingdom’s financial landscape 

The accelerating trend of Saudi banks looking toward debt markets is set to transform the Kingdom’s financial landscape,

From ADL’s perspective, Nikkar believes that this shift is likely to deepen the capital markets, enhance liquidity, and introduce a wider array of financial instruments to market participants, thereby attracting a more diverse group of investors.

“The Saudi debt capital market is poised to exceed SR2 trillion outstanding over the next few years, driven by government projects under Vision 2030, deficit funding, diversification efforts, and ongoing reforms,” he said.

“This substantial growth indicates a maturing financial market capable of supporting large-scale economic initiatives. Collectively these developments will foster a more dynamic and diversified financial services ecosystem in Saudi Arabia,” the ADL representative added.

Additionally, the accelerated shift of Saudi banks toward debt markets will fundamentally transform the Kingdom’s financial landscape by enabling greater sophistication, resilience, and competitiveness.

From Khan’s point of view, Saudi banks hold an average capital adequacy ratio that provides a strong foundation for leveraging debt markets without compromising financial stability.

The shift coincides with the Kingdom’s efforts to develop the domestic capital markets, as evidenced by initiatives such as the Saudi Stock Exchange reforms and the Financial Sector Development Program.

Khan believes this trend is likely to have a transformative effect on the expansion of debt market instruments.

“Saudi banks are increasingly involved in issuing corporate bonds, sukuk, and hybrid instruments to diversify their funding sources. This diversification reduces reliance on short-term deposits, thereby enhancing long-term stability,” Khan said.

The trend will also lead to greater integration with global markets, technology and innovation in finance, and enhanced environmental, social and governance alignment.

On integration with global markets, Khan said: “Participation in international debt markets has already attracted significant foreign investments. For instance, Saudi Arabia’s $10 billion green bond issued in 2023 was oversubscribed threefold, reflecting investor confidence. This global integration will help Saudi banks build stronger partnerships and access lower-cost capital.”

With regards to technology and innovation in finance, he believes the way debt instruments are issued and traded will be transformed, saying: “The Kingdom is embracing fintech to streamline debt market activities. For example, digital sukuk issuance platforms and blockchain-based systems are being explored to enhance transparency and efficiency.” 

Khan added: “The rise of ESG-focused investments, particularly green bonds and sukuk, will push Saudi banks to prioritize sustainable finance. This aligns with Vision 2030 goals of achieving net-zero emissions by 2060 and attracting investors who prioritize sustainability.” 

Bhavya Kumar, managing director and partner at BCG, believes that an increasing reliance on debt markets presents opportunities and risks for the Kingdom’s banking sector.

“While it supports Saudi’s broader economic goals under Vision 2030 by diversifying funding sources — reducing dependency on deposits, improving risk management practices required to meet international investor expectations, and fostering financial market development — it also introduces vulnerabilities related to market volatility, leverage, and systemic risks,” Kumar said.

LONDON: Oil prices rose on Friday and were heading for a second consecutive weekly gain as fresh US sanctions on Iran and the latest output plan from the OPEC+ producer group raised expectations of tighter supply.

Brent crude futures were down 23 cents, or 0.3 percent, at $71.77 a barrel by 4:00 p.m. Saudi time. US West Texas Intermediate crude futures fell 13 cents, or 0.2 percent, to $67.94.

On a weekly basis, Brent was on track to rise more than 1.5 percent and WTI 1 percent, marking their biggest gains since the first week of the year.

The US Treasury on Thursday announced new Iran-related sanctions, which for the first time targeted an independent Chinese refiner among other entities and vessels involved in supplying Iranian crude oil to China.

New US sanctions against Iran’s oil exports triggered Thursday’s rally in oil prices along with the OPEC+ pledge to compensate for overproduction, said PVM analyst Tamas Varga.

Thursday’s announcement marked Washington’s fourth round of sanctions against Iran since US President Donald Trump in February promised “maximum pressure” on Tehran and pledged to drive the country’s oil exports to zero.

Analysts at ANZ Bank said they expect a 1 million barrels per day (bpd) reduction in Iranian crude oil exports because of tighter sanctions. Vessel tracking service Kpler estimated Iranian crude oil exports above 1.8 million bpd in February.

Oil prices were also supported by the new OPEC+ plan for seven members to cut output further to compensate for producing more than agreed levels. The plan would represent monthly cuts of between 189,000 bpd and 435,000 bpd until June 2026.

OPEC+ this month confirmed that eight of its members would proceed with a monthly increase of 138,000 bpd from April, reversing some of the 5.85 million bpd of output cuts agreed in a series of steps since 2022 to support the market.

“While the group shares a plan for compensation cuts, it certainly doesn’t mean members will follow it. A handful of members have consistently produced above their target production levels,” ING analysts said in a note on Friday.