Saudi Arabia’s capital markets will play a key role in funding not just private sector investments but also giga-projects such as Neom, the IPO for which is expected in 2024, said S&P Global Ratings.
Government reforms and high oil prices are creating significant investment opportunities for Saudi Arabian corporates. Given the country's many government schemes, investment commitments, and private sector spending plans, its investment needs are significant. The banking sector will not be able to meet all needs despite its strong capitalisation, S&P said in an analysis.
Saudi Vision 2030's investment programme continues to drive funding requirements, while the authorities are also pushing to deepen local debt and equity markets and increase FDI. The Saudi Stock Exchange, Tadawul, is the largest equities market in Mena by market capitalisation and trading volumes.
Saudi Aramco IPO
The 2019 Saudi Aramco IPO was a major step and several Saudi entities have tapped the equities market. This year, as of November 24, 2022, 15 companies have undertaken an IPO and raised around SR26 billion ($7 billion) while 16 companies have done so on the parallel market (Nomu) raising SR11 billion ($3 billion) in addition to ETFs and CEFs.
Saudi debt markets, like others around the world, have been less active due to uncertainties about rising interest rates and inflation, but we expect long-term issuance trends to be positive. Indeed, the magnitude of contemplated investments, notably from the corporate sector, will necessitate debt issuance as a complement to the banking sector and a way to attract foreign debt investors.
This spells a big change for Saudi corporates, with most currently relying on the banking sector or other direct/indirect government funding. Tadawul is focused on diversifying the industries represented on the stock exchange in line with Financial Sector Development Program directives. It is working with the Capital Market Authority of Saudi Arabia to simplify processes and attract local and international issuers by improving market functionality and efficiency, expanding access, strengthening corporate governance, and increasing transparency. This aligns with Vision 2030's goal of creating a sophisticated and advanced capital market.
Capital markets transactions
S&P expects growing capital markets transactions, particularly as more GREs are listed on the stock exchange. In July 2022, for example, Crown Prince Mohammed bin Salman announced plans for an IPO of Neom on Tadawul as early as 2024. Neom is going to be a large smart city built in north western Saudi Arabia on the coast of the Red Sea. It will reportedly cost about SR1.2 trillion ($320 billion) during its first construction phase, which runs until 2030.
PIF is said to be financing half the project while the rest will likely be externally funded, including through the IPO.
In S&P’s view, any difficulties in sourcing adequate external funding, and at a reasonable cost, could impede the pace of development or threaten profitability prospects, as the viability of the whole project and its long-term returns are still to be demonstrated.
S&P anticipates Vision 2030 will drive the fiscal outlook for Saudi Arabia with PIF and other government agencies setting the pace of investment, followed by private local companies.
Investment will likely remain fairly high as a percentage of GDP (gross fixed capital formation was 24% at Q2 2022). Efforts to drive non-oil growth via foreign direct investment (FDI) and mega projects should also support GDP growth. S&P views the country's business fundamentals as supportive with relatively high oil prices yielding a revenue windfall and allowing the government the fiscal room to continue its large capex plans.
High oil prices have helped Saudi Arabia's strong recovery in 2022, but growth will slow in 2023 because of supply cuts agreed under Opec+. Aside from high oil prices, increased oil production and robust non-oil momentum also helped grow the economy this year. GDP increased for the sixth consecutive quarter, growing 8.6% year-on-year in the third quarter of 2022, according to the flash estimates published by the General Authority for Statistics. Saudi Arabia is set to become one of the world's fastest-growing large economies in 2022.
Real GDP growth
S&P expects real GDP growth in excess of 7.0% this year. S&P estimates a return to fiscal surpluses at 6.3% of GDP in 2022 and 3.5% in 2023. With the Brent oil price expected to average about $100/bbl in 2022 and remain elevated through 2023, S&P expects the current account to record significant surpluses this year and next.
S&P estimates the current account surplus to reach a very large surplus of 13.7% of GDP in 2022, the highest since 2013. S&P expects the surplus to moderate to 5.9% on average over 2023-2025 as oil prices taper.
PIF is the main force
Public Investment Fund (PIF) has $620 billion of assets under management (AUM; Q1 2022) and is a catalyst for Saudi Arabia's economic transformation. The fund has identified 13 strategic sectors to prioritise to best support the national economy. These are aerospace and defence; automotive; transport and logistics; food and agriculture; construction and building components and services; entertainment, leisure, and sports; financial services; real estate; utilities and renewables; metals and mining; health care; consumer goods and retail; and telecom, media and technology.
To fulfil Vision 2030, PIF and its portfolio companies aim to help grow Saudi Arabia's annual non-oil GDP by about 7%. PIF's latest five-year strategy is to:
*Invest a minimum of $40 billion annually in domestic projects and investments;
*Contribute $320 billion to non-oil GDP cumulatively through its portfolio companies;
*Increase AUM to more than $1.07 trillion; and
*Create 1.8 million direct and indirect jobs by the end of 2025.
Vision 2030 includes several ambitious goals and investment expectations. Its key goals are:
*Raising the private sector's contribution to GDP to 65% (40% currently);
*Increasing the contribution of FDI to GDP to 5.7% (from 3.8%);
*Increasing the contribution of non-oil exports to GDP to 50% (from 16%);
*Reducing the unemployment rate to 7.0% (9.7% as of Q2 2022); and
*Being among the top 10 competitive economies in the world.
These 2030 targets are ambitious. Even if they are not fully met, S&P expects the country will make some progress. The productive capacity of the non-oil economy could potentially increase as a result.
The government plans to transform the financial, health care, housing, and infrastructure sectors, among others. It also wants to focus on human capital and sustainability. It launched the National Investment Strategy (NIS) in 2021 to empower investors, offer investment opportunities, provide financing solutions, and enhance competitiveness.
The NIS will launch several initiatives over the coming years, with more than SR12 trillion to be invested in the national economy during 2021-2030. The Shareek plan to increase private-sector companies' domestic investments is expected to inject SR5 trillion; PIF is set to contribute SR3 trillion; and the remaining SR4 trillion will likely be generated by investments facilitated by the NIS. The economy will also receive SR10 trillion of government spending over the next eight-to-10 years and a further SR5 trillion from private consumption and investment. This brings the total injection to SR27 trillion ($7 trillion) in the next decade. The political will to invest remains strong.
PIF's liquid assets
S&P anticipates the vast majority of investments will be off the government's balance sheet and therefore will not weaken its fiscal position. However, S&P considers that these strategic domestic investments will reduce PIF's liquid assets.
Saudi Corporates' Credit Quality
Investments in various corporate sectors could promote growth and increase business opportunities for companies. But this will not automatically lead to us to assess them as having stronger business risk profiles, a factor in our ratings. To assess an entity's business risk S&P looks at its profitability and competitive advantages, not just its investments in ambitious projects--which could ultimately prove detrimental to cash flow generation and entail additional operating risks, especially if outside its core business.
Similarly, rapid growth in projects that are not or only moderately profitable could increase leverage and weaken cash flows in high capital expenditure (capex) cycles, and weigh negatively on S&P’s assessment of a company's financial risk profile. However, if a company establishes a track record of adhering to sound and transparent financial policies, S&P could reassess its financial risk profile assuming its credit metrics sustainably improve. S&P also assesses an entity's liquidity management, transparency of foreign investments, and its risk management including how skilled senior staff are at managing transformational development.
S&P does not anticipate imminent rating actions on Saudi corporates--as they carve out significant capex budgets over the next two-to-five years--given their healthy balance sheets and strong liquidity.
-- TradeArabia News Service