Saudi banks in strong position to harness the benefits of economic diversification

Saudi banks in strong position to harness the benefits of economic diversification
The Kingdom has actively utilized the debt market to finance its ambitious projects, leading the GCC bond market in the first half of 2024. SPA
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Updated 01 October 2024
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Saudi banks in strong position to harness the benefits of economic diversification

Saudi banks in strong position to harness the benefits of economic diversification
  • Saudi Arabia and Oman are the top two GCC countries with the lowest volatility in non-oil sector expansion

RIYADH: Saudi banks will see their client base expand and earnings increase thanks to government-backed economic diversification efforts that are driving innovation and boosting productivity, according to a new report.

According to Moody’s analysis of banks in the Gulf Cooperation Council and Commonwealth of Independent States, Saudi Arabia and Oman were the top two GCC countries with the lowest volatility in non-oil sector expansion from 2020 to 2023. 

The Kingdom also ranked among the top three for cumulative non-oil growth during this period, along with the UAE and Qatar.

Vladlen Kuznetsov, assistant vice president at Moody’s Ratings said: “Oil-dependent economies in the Gulf, Iraq, Kazakhstan and Azerbaijan are broadening as governments provide funding for diversification initiatives.”

He added: “Barring external shocks, growth in non-oil sectors is poised to exceed 3 percent or 4 percent over the coming years, accelerating from an average of around 1 percent or 2 percent in 2016-2021. This will outpace growth in oil sectors in most cases.” 

Moody’s noted Saudi Arabia’s Vision 2030 aims to cut oil dependence by boosting real estate and tourism with projects like NEOM. Banks, though small relative to the economy, are increasingly funding non-oil ventures and have high-quality loans.




State financing is fueling large infrastructure projects. (SPA)

Slower deposit growth might push them toward unstable market funding. Nonetheless, strong government creditworthiness and ongoing diversification are expected to improve support for banks during economic stress.

The Kingdom has actively utilized the debt market to finance its ambitious projects, leading the GCC bond market in the first half of 2024.

According to a report from Kuwait-based Markaz, the Kingdom raised $37 billion through 44 issuances over this period. Despite these substantial funding needs, Saudi banks maintain healthy balance sheets, with S&P Global Ratings assigning investment-grade ratings and stable outlooks to most major lenders.

The economies of the Gulf states, Iraq, and parts of the CIS remain heavily reliant on oil and gas. However, climate concerns are driving a shift toward new sectors, supported by government diversification efforts.

State financing is fueling large infrastructure projects and offering subsidies to small and medium-sized enterprises in non-oil sectors. 

GCC governments, including Saudi Arabia, Kuwait, and Oman, as well as Qatar, UAE, and Bahrain, are working to reduce their dependence on hydrocarbons through ambitious diversification initiatives – along with CIS countries including Kazakhstan and Azerbaijan.

According to Moody’s, these projects aim to mitigate economic vulnerability to oil price fluctuations and enhance resilience to the global carbon transition, benefiting local banks. However, the full impact of these diversification efforts may take years to realize.

Benefits and challenges of diversification

In oil-dependent economies, domestic banks often focus on narrower non-oil sectors like real estate, construction, trade, and services, as well as some manufacturing, according to Moody’s.

Large oil and gas companies in these economies, being financially robust, typically borrow from global banks rather than domestic ones, limiting the lending opportunities for local banks.

Consequently, domestic banks’ loan portfolios are dominated by a few large entities, and their deposit bases are similarly concentrated.

Most large-scale diversification projects are financed by governments and state-owned enterprises, rather than local banks, which contrasts with more developed economies where such efforts are often bank-funded, the report added.

In GCC countries, the presence of wealthy governments and state-owned firms further reduces the demand for domestic bank loans.

The report mentioned that as these economies diversify, banks will benefit from several factors. They will expand their franchises and improve financial inclusion, as non-oil sectors tend to be more stable than oil sectors, leading to steadier economic growth and increased public wealth.

This wealth boost enhances the creditworthiness of retail borrowers and offers banks more lending opportunities. New companies will emerge, profits will rise as firms innovate, and household incomes will increase.

More lending options will help banks manage risks better and stabilize credit cycles in volatile sectors like retail and construction. With reduced economic volatility, banks will find it easier and cheaper to obtain long-term funding.

Increased monetary and economic stability will attract long-term deposits and foreign investment, improving banks’ funding sources and supporting their growth.

Stable government finances will also enhance their ability to assist banks during difficult times, although these benefits may take years to fully materialize.

The benefits of economic diversification vary across banks and economies due to factors like legal frameworks, rule of law, and corruption according to Moody’s.

Larger banks, especially in developed economies, can leverage diversification more effectively due to their financial strength, supporting growth in sectors like manufacturing and construction.

Banks in Qatar, UAE, and Kuwait are already significant in financing economic development. However, the impact on banks’ loan quality, funding, and government support will depend on their current conditions.

For example, banks in Saudi Arabia with low problem loans may see less impact compared to those with higher problem loans, like in Kazakhstan.

Banks in the CIS and Iraq, where banking sectors are smaller relative to the economy, have the most potential for growth.

Overall, banks in Kazakhstan, Azerbaijan, and Qatar, as well as Oman, the UAE, and Saudi Arabia are well-positioned to benefit from diversification according to Moody’s. They either experience strong economic momentum or have opportunities to tackle key credit challenges, such as franchise growth, loan quality, funding, and government support.

Government role

According to Moody’s, diversification relies heavily on government initiatives and can be hindered by unfavorable commodity price changes or geopolitical shocks.

Countries like Saudi Arabia, UAE, and Kuwait, as well as Qatar, Azerbaijan, and Kazakhstan, have substantial resources for infrastructure and sectoral subsidies, though not all invest significantly.

Saudi Arabia’s government budget expenditures amounted to $344 billion in 2023, reflecting an 11 percent increase from the previous fiscal year. In an announcement in December 2023, the Ministry of Finance projected expenditures of 2024 to total $333 billion. 

This translates into 27.5 percent of government debt to GDP ratio according to IMF World Economic Outlook in April.

This is in comparison to the UAE’s 2024 budgeted expenditures of $17.44 billion and Kuwait’s projected government expenditures of $80 billion, according to announcements by their respective ministries of finance.

According to the IMF, Kuwait’s debt-to-GDP ratio is projected to be 7.1 percent, and the UAE’s is expected to be 30.3 percent

Saudi Arabia boasts one of the highest reserve coverage ratios among Fitch-rated sovereigns, equivalent to 16.5 months of current external payments.

This budget will focus on accelerating the implementation of critical programs essential to achieving the goals of Saudi Vision 2030 according to the Ministry. 

It also highlighted the importance of fostering stronger partnerships with the private sector to advance economic diversification and enhance job opportunities for the Saudi workforce.
 


Qatar commits to investing $10bn in India

Qatar commits to investing $10bn in India
Updated 5 sec ago
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Qatar commits to investing $10bn in India

Qatar commits to investing $10bn in India

NEW DELHI: Qatar has committed to investing $10 billion in India across various sectors, the two nations said in a joint statement on Tuesday, after Qatar’s Emir Sheikh Tamim bin Hamad Al-Thani visited New Delhi.

Indian Prime Minister Narendra Modi said he had a “very productive meeting” with Qatar’s Emir, who was on a two-day visit to New Delhi.

“Trade featured prominently in our talks. We want to increase and diversify India-Qatar trade linkages,” Modi said in a post on X. It was the first such visit by a Qatari Emir to the South Asian nation in 10 years.

According to the statement, Qatar will invest $10 billion in India in infrastructure, technology, manufacturing, food security, logistics, hospitality and other sectors.

The two countries will aim to double their annual trade to $28 billion in the next five years and are exploring the signing of a free trade agreement, the Indian foreign ministry said earlier in the day.

Bilateral trade between the two nations stood at $18.77 billion in the fiscal year that ended in March 2023, mainly comprising liquefied natural gas imports from Qatar.

Qatar accounted for more than 48 percent of India’s LNG imports that year.

The two sides said they would work to enhance bilateral energy cooperation, including mutual investments in energy infrastructure, as well as look at settlement of bilateral trade in their respective currencies. 


Oil Updates — crude gains on US, Russia supply worries; market seeks Ukraine talks clarity

Oil Updates — crude gains on US, Russia supply worries; market seeks Ukraine talks clarity
Updated 39 min 28 sec ago
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Oil Updates — crude gains on US, Russia supply worries; market seeks Ukraine talks clarity

Oil Updates — crude gains on US, Russia supply worries; market seeks Ukraine talks clarity

HOUSTON/SINGAPORE: Oil prices edged up on Wednesday amid worries of oil supply disruptions in the US and Russia, and as markets awaited clarity on the Ukraine peace talks.

Brent crude futures were up 14 cents, or 0.2 percent, at $75.98 a barrel at 7:50 a.m. Saudi time, and possibly set for a third day of gains.

US West Texas Intermediate crude futures for March rose 16 cents, or 0.2 percent, to $72.01, up 1.8 percent from the close on Friday after not settling on Monday because of the Presidents’ Day public holiday. The March contract expires on Thursday and the more active April contract gained 14 cents, or 0.2 percent, to $71.97.

“The psychologically important $70 level appears to have held firm, aided by the Ukrainian drone attack on the Russian oil pumping station and fears that cold weather in the US may curtail supply,” said IG market analyst Tony Sycamore.

“On top of that there is some speculation that OPEC+ may decide to delay its planned supply increase in April,” he said, referring to the Organization of the Petroleum Exporting Countries and allies.

Russia said oil flows through the Caspian Pipeline Consortium, a major route for crude exports from Kazakhstan, were reduced by 30 percent to 40 percent on Tuesday after a Ukrainian drone attack on a pumping station. A 30 percent cut would equate to the loss of 380,000 barrels per day of supply to the market, according to Reuters calculations.

Meanwhile, cold weather threatened US oil supply, with the North Dakota Pipeline Authority estimating that production in the country’s No. 3 producing state would be down by as much as 150,000 bpd.

US President Donald Trump’s administration said on Tuesday it had agreed to hold more talks with Russia on ending the war in Ukraine. A deal could ease or help remove sanctions that have disrupted the flows of Russian oil shipments.

Analysts at Goldman Sachs said a potential Ukraine-Russia peace deal and associated easing in sanctions on Russia is unlikely to significantly raise Russia oil flows.

“We believe that Russia crude oil production is constrained by its OPEC+ 9 million barrels per day production target rather than current sanctions, which are affecting the destination but not the volume of oil exports,” they said in a report.

Israel and Hamas will also begin indirect negotiations on a second stage of the Gaza ceasefire deal, officials said on Tuesday.

However, Trump said on Tuesday he intends to impose auto tariffs “in the neighborhood of 25 percent” and similar duties on semiconductors and pharmaceutical imports.

Tariffs could raise prices for consumer products, weaken the economy and reduce demand for fuel. 


Saudi Arabia raises $818m in February sukuk sale 

Saudi Arabia raises $818m in February sukuk sale 
Updated 43 min 14 sec ago
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Saudi Arabia raises $818m in February sukuk sale 

Saudi Arabia raises $818m in February sukuk sale 

RIYADH: Saudi Arabia raised SR3.07 billion ($818 million) through its February sukuk issuance as the Kingdom continues to tap debt markets to support economic diversification efforts. 

The latest riyal-denominated offering, managed by the National Debt Management Center, follows a SR3.72 billion issuance in January. The Kingdom raised SR11.59 billion in December and SR3.41 billion in November, according to official data. 

Sukuk, a Shariah-compliant financing instrument, allows investors to hold partial ownership in an issuer’s assets while adhering to Islamic finance principles. Saudi Arabia has been a key player in the global sukuk market, leveraging debt sales to finance projects under its Vision 2030 economic transformation plan. 

According to the NDMC, the February issuance was split into four tranches. The first, valued at SR585 million, matures in 2029, while the second, at SR1.70 billion, is set to mature in 2032. The third tranche, worth SR404 million, is due in 2036, and the final portion, totaling SR376 million, will expire in 2039. 

Saudi Arabia is expected to play a leading role in driving global debt and sukuk issuance over the next two years, Fitch Ratings said earlier this month. The Kingdom’s financial institutions and corporations are increasingly turning to international debt markets to diversify their funding sources, the agency noted. 

A separate report by Fitch projected Saudi Arabia’s debt capital market to reach $500 billion by the end of 2025, supported by a growing pipeline of infrastructure and development projects. 

The Kingdom is also set to lead bond and sukuk maturities in the Gulf region, with redemptions expected to total $168 billion between 2025 and 2029, according to a December report by Kamco Invest. Government-issued debt will account for the largest share, with maturities projected to reach $110.2 billion during the period. 

Across the Gulf Cooperation Council, the debt capital market surpassed the $1 trillion mark in outstanding issuances by the end of November, Fitch said in a separate report. 

Meanwhile, global sukuk issuance is forecast to range between $190 billion and $200 billion in 2025, driven by activity in key markets such as Saudi Arabia and Indonesia, according to S&P Global. The credit rating agency reported that global sukuk sales totaled $193.4 billion in 2024, slightly down from $197.8 billion in 2023.


Experts highlight importance of data in capital markets at Saudi forum

Experts highlight importance of data in capital markets at Saudi forum
Updated 18 February 2025
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Experts highlight importance of data in capital markets at Saudi forum

Experts highlight importance of data in capital markets at Saudi forum
  • Industry specialists said that real-time data availability is equally crucial for other participants

RIYADH: Accessing and interpreting data effectively is crucial for investors’ success in capital markets, as it enables them to make informed and timely decisions, according to experts. 

During a panel discussion at the Capital Markets Forum in Riyadh on Feb. 18, industry specialists said that real-time data availability is equally crucial for other participants, such as brokers, asset managers, and external institutions.

“What I believe is that data is the new alpha. So, those who master it will not only participate or win in the market, but they will define the market,” said Mehdi Miri, CEO of DirectFN. 

He added: “For investors, data is really about making smart and fast decisions. What investors need to see today is real-time AI-powered data that will help them look into insights and foresight so that they can see market opportunities before the market moves.” 

Miri further said that brokers and banks are using advanced analytics to build their trading and hedging strategies, ultimately improving their execution process. 

Yazeed Al-Domaiji, CEO of Wamid, a subsidiary of Saudi Tadawul Group, highlighted the importance of accessing data while maintaining rules and regulations. 

“Capital markets are driven by data. Data is there from more than 100 years ago. Everybody in capital markets is looking for data, using data to make decisions. As a capital market institution, it is necessary to find the balance of how we can innovate while maintaining the regulations,” said Al-Domaiji. 

He added that Wamid is aiming to play a major role in enabling the capital market industry in the Kingdom as it has announced a recent partnership with Google, with Saudi Arabia having strategic plans to adopt data and artificial intelligence in the sector.

Al-Domaiji said that Wamid is encouraging innovation in the capital market by focusing on two pillars, including data solutions and infrastructure technology. 

“In data solutions, we announced our partnership to launch our project for the data terminal. What we are planning to do is to offer a set of data that suits the demand of the market. We are focussing on satisfying the issuers, the capital market institutions, and the investors through a series of data with easier accessibility and good quality,” said Al-Domaiji. 

He added: “On the infrastructure side, we are helping the capital market to increase the access of institutional investors, especially for the HFTs (high-frequency trading). So, today, in Saudi Arabia, HFT trading is around 25 percent of the daily average trading.” 

Miri further said that data has become a strategic asset over time, and it is not just a global trend but a local and regional reality. 

“Data is a strategic asset. When we talk about monetization, data is a business in itself. This is a Spotify moment for data, where we are bringing and converging raw data into an on-demand revenue-generating machine,” added Miri. 

He said the capital market currently demands data that are not just numbers but enriched pieces of information, which should give foresight on what to do next. 

Miri also underscored the vitality of personalizing the data and integrating them into one single platform for better efficiency and quick decision-making. 

Regarding the future outlook of the importance of data in capital markets, Miri said: “Further down the road, if you have the data and if you have the liquidity, this could be the new asset class. A few decades ago, no one was thinking about carbon trading. In the future, we will be talking about data trading. Obviously, we have to balance it with data protection and regulation.” 

Underscoring the importance of datasets, Al-Domaiji added that data will become the “new currency for the capital market” in the future. 

Doug Peterson, special adviser and member of the board of directors at S&P Global, stressed the importance of data privacy and said: “The first question you have to ask from a governance standpoint is how I am going to protect my data. Do you want your data to be the one that is used in a model that is being built? Once it is there, that model is going to be using your data forever, and you are going to get paid for it.” 

He added: “I am really encouraged by what is happening in the Saudi market. We are very pleased at S&P Global to start building the local presence, because we think this is one of the most important markets in the future.” 

Katharine Furber, global head of emerging markets trading product at Bloomberg LP, said that fixed income space is seeing huge potential in the usage of data. 

“In the fixed income space, of course, it is the sell side indication, which indicates the desire to buy or sell a bond. But also trading data, and by trading data, I do not just mean what did they trade at what price. They want to build a rich story around the trade to learn as much as possible, which includes how many counterparties they asked on the trade; whether or not those counterparties responded to the trade request,” said Furber. 


ADNOC Drilling eyes $1bn in investments, Gulf expansion plans

ADNOC Drilling eyes $1bn in investments, Gulf expansion plans
Updated 41 min 12 sec ago
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ADNOC Drilling eyes $1bn in investments, Gulf expansion plans

ADNOC Drilling eyes $1bn in investments, Gulf expansion plans

RIYADH: UAE’s ADNOC Drilling is projecting significant growth, expecting over $1 billion in investments for 2025. The company also has plans to expand its operations into Oman and Kuwait, an official revealed.

In an interview with Arab News at the Capital Markets Forum, Youssef Salem, the company’s chief financial officer, discussed the expansion strategy, emphasizing the confidence ADNOC Drilling has in the long-term, robust plans of operating companies in these countries.

“For example, Kuwait Oil Co. is going to 4 million barrels of production capacity of oil per day, also launching for the first time their offshore operations. Similarly with Oman, a lot of tenders for new rigs to upgrade their drilling field,” he explained.

Salem shared that the firm’s expansion into these Gulf nations, along with its existing operations in Jordan, is based on establishing strong relationships with local operators. ADNOC Drilling has already pre-qualified with these entities and is focusing on organic growth through partnerships and joint ventures with established regional companies.

Regarding the financial impact of the investments, Salem noted that Kuwait is currently a large market with plans to expand to 200 rigs, while Oman is also growing its market to 100 rigs. “So, these two markets combined are almost three times the size of the UAE rig market, and hence, we see it as a very substantial opportunity,” he added.

Salem pointed out the ongoing shift in ADNOC Drilling’s revenue sources. “Today, if you look in general, the vast majority of our revenues come from the UAE. That is something that is evolving. For example, on the Enersol side, which is our global investment, we expect by next year to have around 7 percent of our net income to come from these global operations.”

The CFO elaborated on the company’s anticipated growth in 2025, with expectations of the onshore segment potentially crossing $2 billion, the offshore segment reaching over $1.4 billion, and oil field services surpassing $1.2 billion—an approximate 50 percent year-on-year growth.

“So, in 2025, we are expecting the onshore to potentially cross $2 billion, the offshore to cross $1.4 billion, and the oil field services to cross $1.2 billion, another almost 50 percent year-on-year growth,” Salem said.

He also revealed that the company plans to invest more than $1 billion in 2025.

“Out of that, $350 million to $550 million will be in additional rigs and oil field service equipment inside the UAE on our roadmap to reach 151 rigs by 2028,” he said.

Additionally, ADNOC Drilling is allocating $700 million to Enersol, its joint venture with Alpha Dubai, which focuses on investing in global energy technology companies, especially those involved in artificial intelligence.

Salem also highlighted the company’s recent acquisitions, noting that ADNOC Drilling completed four acquisitions worth $800 million in the previous year and plans further acquisitions totaling $700 million in 2025.

Discussing the company’s 2024 results, which reached a record revenue of $4 billion, Salem stated: “The onshore segment generated $1.9 billion of revenues from 95 land rigs, which is the largest drilling feed on the onshore side in the Middle East and North Africa. Similarly, the offshore segment generated $1.3 billion of revenue from 47 offshore rigs. Again, the largest, and then the oil field services, which is our fastest-growing segment, growing more than 100 percent year on year.” He also added that the oil field services segment generated $100 million in the fourth quarter and expects further growth in each segment in the upcoming year.

Regarding the forum’s agenda, Salem mentioned: “Tomorrow and the day after, we have two full days of investor meetings. Saudi investors obviously are a very key part of our shareholder register, but also, you have a lot of global investors who are flying into the forum to attend.”

He emphasized that the forum presents a valuable opportunity to engage with global investors.

Salem also spoke about ADNOC Drilling’s stock, saying it is the most covered in the UAE, with 18 analysts tracking it, and holds the highest number of buy recommendations in the Middle East, with 15 advisers endorsing it.

He acknowledged the increasing significance of Saudi Arabia’s financial sector, highlighting that the Kingdom hosts leading banks and noted that Tadawul is recognized for its liquidity and market activity, supported by a robust ecosystem of market makers, brokers, analysts, and investors.

“Similarly, on the Abu Dhabi exchange side in the UAE, one of the fastest growing exchanges across the trillion dollars of market capitalization between the Abu Dhabi exchange and the Dubai financial market,” Salem said, describing the event as the “biggest capital market in the world,” a collaborative gathering where regional exchanges unite.

On ADNOC Drilling’s operations in Saudi Arabia, Salem expressed the company’s deep commitment to its operations in the Kingdom. He explained that ADNOC Drilling operates multiple subsidiaries in close collaboration with Saudi Aramco, such as EV, a subsidiary from Enersol offering smart cameras for 3D visualization beneath wells. He also mentioned NTS, a manufacturing business with a significant facility in Dammam, employing over 100 people to manufacture drilling and service equipment for companies like Schlumberger, Halliburton, and Baker Hughes.

“For us, Saudi Arabia continues to be very strategic for our actual underlying operation, and we continue to find ways to build even deeper relationships,” Salem affirmed.

Regarding a potential dual listing on the Saudi Exchange, Salem shared that the company’s current focus is primarily on the Abu Dhabi Exchange, where they already enjoy significant liquidity, with over $20 million traded daily.

“We have the benefit of having a very liquid stock trading more than $20 million a day. Saudi investors are able to invest on the Abu Dhabi Exchange. We have a lot of the major Saudi sovereign wealth funds, pension funds, asset managers able to invest from here,” he said.

He added: “We do not see any technical limitation to their ability to invest, and we think we can continue to grow the Saudi investor base even more in ADNOC Drilling on the Abu Dhabi exchange.”