Saudi banks weathering external debt surge amid Vision 2030 push: S&P report

01/05/2025 02:33 AST

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.

Arab News