Key Takeaways
- The development of Saudi Arabia's capital markets will likely play an important role in facilitating the realization of Vision 2030. A robust and high-quality local debt market is key to developing and transforming the economy and could contribute to the funding needs arising from large Vision 2030 projects.
- We expect foreign currency issuance in international markets and local currency debt market growth to spur substantial expansion of the Saudi debt capital market. As this market evolves, government-related entities, major financial institutions, and key blue chip corporates will likely dominate initially, with lower credit quality companies following suit.
- In our view, the evolution of our ratings will resemble that in some developed markets--where entities with the highest credit quality access the public debt market first, and entities further down the credit spectrum follow--although likely at a faster pace in Saudi Arabia's case.
In line with its Vision 2030 program, Saudi Arabia has taken significant initiatives to diversify its economy and reduce its oil dependency. The development of its financial sector is one of the key tenets of Vision 2030. It aims to advance the capital market and attract private sector and foreign institutional investors to finance some of the country's key projects.
The evolution and development of the debt market--powered by foreign currency issuance in international markets and local currency debt market growth--will be key to meeting these increasing financing needs. Given the significant economic transformation expectations and funding needs associated with Vision 2030, we expect Saudi Arabia's debt market evolution to potentially outpace that seen in some other developed markets, with government-related entities (GREs), major financial institutions, and key blue chip corporates initially leading the way.
Equity Market Initiatives Pave The Way For Expansion
Over the past few years, the Capital Market Authority (CMA) and Tadawul, Saudi Arabia's stock exchange, undertook several initiatives to develop Saudi capital markets. They simplified listing processes, invested heavily in market infrastructure, approved rules to facilitate foreign investors' access to Saudi capital markets, and implemented measures to strengthen corporate governance practices and further improve transparency. In 2019, Saudi stocks were included in the MSCI Emerging Markets Index as well as the relevant indices of FTSE Russell and S&P Dow Jones, further increasing the global visibility of Saudi equities. Tadawul is by far the largest equities market in the Middle East and North Africa region by market capitalization and trading volumes. The IPO of Saudi Arabian Oil Company (Saudi Aramco, unrated) in 2019 was a milestone and we have since seen several other Saudi entities tap into the equities market. As of June 15, 2023, the market capitalization of the Tadawul All Shares Index was over USD2.9 trillion, up from around USD420 billion at year-end 2015. Even if we were to exclude the contribution from the market capitalization of Saudi Aramco, market capitalization has almost doubled since then (see chart 1).
Chart 1
Given the sheer size and long-term nature of investments under Vision 2030, we do not believe that the banking sector alone will be able to meet funding needs. Rather, we expect Saudi corporates to increase their borrowing activities in debt capital markets, leading to a progressive rebalancing of the country's financial system and the development of a broader local capital market.
In 2020, the CMA allowed non-resident foreign investors to directly invest in listed and non-listed debt instruments and in 2022, FTSE Russell started to include the Saudi Arabia sovereign's local-currency Sukuk issuances in its FTSE Emerging Markets Government Bond Index (EMGBI). It announced that it cancelled its share in sukuk and bond trading commissions in Tadawul starting from May 2023 to further encourage debt instrument trading in the secondary market. We also expect the authorities to implement several supportive initiatives to support the development of the local currency debt capital market.
The gradual emergence of a corporate debt market has seen some leading GREs issuing bonds, a trend that is likely to continue in the medium term. We believe foreign currency issuance in international markets will play a vital role in injecting institutional funds into key projects. Yet, the local debt market will also be crucial to meet the increasing funding needs for conventional bonds and sukuks that arise from Vision 2030.
Banks And GREs Will Lead The Way
We expect Saudi Arabia's flagship companies to play a leading role in the development of the country's local currency debt market and to tap into it before mid- and small-cap issuers. Apart from the sovereign, Saudi Arabia's financial institutions are important issuers in the country's emerging local currency market. Some of the key GREs, such as Saudi Aramco, and a few other corporates also issued in this market. We believe key GREs will start to more actively tap into this market as part of their long-term funding strategy. Given the potential investment-related trickle-down effects of Vision 2030, the country's key blue chip corporates are also likely to follow the lead of banks and GREs. Therefore, issuers with the highest relative credit quality might dominate the capital market, before relatively lower rated issuers begin to emerge. This is in line with the development we saw in some other bond markets around the world.
To get a better idea of domestic entities' potential credit quality distribution, we conducted a desktop analysis of about 160 Saudi entities' indicative credit quality on a national scale (see chart 2). We used some model implied rating analysis, and a high-level individual analysis and review, based on the most recent publicly available financial information, global sector specific analytical approaches, and the mapping principles of our national and regional scale credit ratings methodology. We also applied some adjustments to the ratings distribution to supplement the portfolio-wide results of the high-level review and account for some of the limitations of a desktop review only. This high-level review was designed to produce an indicative, market-wide potential ratings distribution and does not constitute an individual credit rating for any entity included in the sample.
Our study shows that banks, followed by most insurance companies, in the sample pool tend to have higher potential average credit quality, compared to other sectors. Their regulated operating environment and generally higher risk management requirements partly contribute to that. Similarly, key GREs would, potentially, have a higher average credit quality. This results from their well-defined, leading market positions, strong balance sheets, and potential sovereign support, given their role in the economy and their link to the government. Further down the credit quality scale would be a number of blue chip corporates with long-standing relationships in the market, followed by medium-sized, family-controlled companies across several sectors that could display varying degrees of credit quality.
Chart 2
Why Local Debt Markets Are Developing In Emerging Economies
Over the past few decades, many large emerging economies, such as Brazil, South Africa, and Mexico, made substantial efforts to develop their local currency debt capital markets.
A developed local debt market enables issuers to access different pools of capital, with varied terms and conditions for various financing needs. It complements the equity market to provide financial solutions for local investment activities and, thus, improves the economy's resilience to stock market volatilities. It also attracts both domestic and foreign investors, creating a deeper and more diversified investor base that should enhance funding availability for issuers. Additionally, the development of a deep local debt market can support greater funding stability by making local funding alternatives more readily available to issuers, which can reduce foreign currency and country risks exposure. A more developed debt capital market will likely create deeper liquidity pools to support various funding needs in the markets.
On top of that, a developed local debt market could create an appealing investment platform for investors, through offering various investable assets supporting the development of healthy pension funds, asset management companies, and insurance companies. It also supports banks in their risk management activities, through providing additional local market funding channels and a local market funding alternative for assets which have traditionally remained on bank balance sheets. This should further assist the bank sector with managing banks' different asset, liability, and liquidity needs and unlocks additional pools of capital. The transaction and price data available in the debt market enhance market transparency and information access, benefiting both issuers and investors.
Ratings Distribution May Evolve Similarly To Other Developed Markets'
In November 2021, we introduced the Kingdom of Saudi Arabia national credit rating scale (KSA scale) in response to increased interest in the local currency debt market and the government's policies to develop the domestic capital market (see "Credit FAQ: Kingdom of Saudi Arabia National Credit Rating Scale Explained").
The KSA scale is designed for the assignment of credit ratings to issuers and issuances in the local market. It provides a rank ordering of credit risk within Saudi Arabia only, complements the global credit rating scale (based on global comparison), and offers finer credit risk differentiation for local issuers and issuances. As Saudi Arabia is developing infrastructure for broader local market participation and foreign direct investment in its capital markets, our KSA scale may help to compare local credits and enhance transparency between Saudi local currency issuances.
The evolution of ratings reflecting a broad spectrum of credit quality distribution may happen at a quicker pace than in other markets, given the economic transformation expectations and associated funding needs.
In general, credit ratings originated in the U.S. already in the early 20th century, but the majority of U.S. corporate issuers still had a rating of 'BBB' category or higher in the 1990s (see chart 3). It took decades to see a diverse rating distribution across the entire rating spectrum. A meaningful, global expansion of ratings below 'BBB' category, particularly 'B' category ratings, only began in the late 1990s and early 2000s, driven by market participants' increasing risk appetite and greater acceptance of lower credit ratings.
Chart 3
Other markets and regions have evolved similarly to the U.S. market, albeit with individual local market nuances affecting their development. For example, the rising number of 'BB' and 'B' ratings in Europe over the past decade (see chart 4), the growth of the 'BBB' segment in Australia over the past two decades (see chart 5), and the somewhat consistent development across most rating levels in Singapore over the past two decades (see chart 6).
Chart 4
Chart 5
Chart 6
Related Criteria
- National and Regional Scale Credit Ratings Methodology, June 8, 2023
- Sector and Industry Variables: National and Regional Scale Credit Ratings Methodology, June 8, 2023
Related Research
- Saudi Arabia's Vision 2030: Some Likely Winners, Dec. 5, 2022
- Saudi Capital Markets Will Be Key To Powering Corporate Investments, Nov. 29, 2022
- GCC Asset Sales Will Increase Transparency, Broaden Funding Sources, And Support Capital Market Development, March 21, 2022
- Understanding The Relationship Between Kingdom Of Saudi Arabia (KSA) National Scale Ratings And Global Scale Ratings, March 14, 2022
- Kingdom of Saudi Arabia National Credit Rating Scale Explained, Nov. 23, 2021
- Vision 2030 Will Push Forward Saudi Arabia's Debt Capital Market, May 4, 2021
This report does not constitute a rating action.
| Primary Credit Analysts: | Timucin Engin, Dubai + 971 4 372 7152; timucin.engin@spglobal.com |
| Dhruv Roy, Dubai + 971(0)56 413 3480; dhruv.roy@spglobal.com | |
| Pierre Gautier, Paris + 0033144206711; pierre.gautier@spglobal.com | |
| Secondary Contacts: | Peter J Eastham, New York + (139) 631-2064; peter.eastham@spglobal.com |
| Fangchun Rong, New York (1) 212-438-0423; fangchun.rong@spglobal.com |
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