The Kingdom’s private sector debt is set to remain below 100% of GDP over the next 1-2 years, according to a report by S&P Global. Despite an uptick in borrowing to bankroll new investments, private sector and sovereign debt is expected to remain “manageable,” the report said.

The rationale: Leveraging rates are expected to grow over the medium to long-term. While this could increase Saudi’s exposure to external market conditions, falling interest rates and favorable market conditions will help offset negative effects.

By the numbers: Saudi government and private sector issuers raised upwards of USD 130 bn in USD-denominated bonds over the past five years, alongside over USD 144 bn in local SAR issuances, according to the report. Government borrowing accounted for around 60% of these issuances.

Banks are expected to take on a larger role going forward. Recent issuances included Al Rajhi Bank and Banque Saudi Fransi’s wrapping up of an AT1 sukuk offering totaling USD 2.25 bn earlier this month. Arab National Bank (ANB) also plans to issue SAR-denominated sukuk via private placement, among other moves on the debt market by Saudi banks.

REMEMBER- Bank credit is expected to grow 10% this year, spurred by corporate lending to fund diversification projects. Meanwhile, lower interest rates and growing demographics are expected to boost mortgage lending, the credit ratings agency said in a separate report last week.

Is a Saudi RMBS market on the cards? Banks have some USD 175 bn in mortgages on their balance sheets at fixed interest rates, financed by short term deposits. As interest rates fall, banks would stand to make gains by offloading these mortgages on secondary markets, leading to the potential rise of a residential mortgage-backed securities (RMBS) market — assuming that legal and regulatory blocks are removed and risks are low, S&P argues. Activity on an RMBS market could give banks further capital to support diversification-related investments.

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