RIYADH: Saudi Arabia’s debt capital market continued its upward trajectory in the first quarter of 2025, defying global challenges and uncertainties.

The market reached $465.8 billion by the end of March, marking a 16 percent year-on-year increase, with sukuk accounting for 60.4 percent of the total, according to Fitch Ratings.

The Kingdom’s debt market is poised to surpass $500 billion in outstanding value by the end of 2025, driven by strong economic fundamentals, diversified funding strategies, and continued progress under Vision 2030.

Fitch Ratings, in its latest report, noted that the sector’s further expansion this year will be supported by increased fiscal deficits, heightened project financing needs, and regulatory initiatives aimed at boosting non-oil economic growth.

“Saudi entities were the largest US dollar debt issuers among emerging markets (excluding China) in the first quarter of 2025. The country also led global dollar sukuk issuance and was the largest debt capital market issuer in the GCC,” said Bashar Al-Natoor, global head of Islamic finance at Fitch Ratings.

He added: “We expect lower oil prices and increasing deficits will drive issuance in 2025 and 2026. Banks, corporates and projects are likely to seek more diverse funding through the DCM, enhancing market development. We rate about 80 percent of the outstanding US dollar Saudi sukuk market, with almost all investment-grade and no defaults.”

Issuance in the first quarter of 2025 surged by 202.4 percent compared to the previous quarter, reaching $37.3 billion. Environmental, social, and governance debt made up 9 percent of dollar-denominated DCM issuance during the period.

The expansion of Saudi Arabia’s asset management industry, whose assets under management have now exceeded SR1 trillion, is also playing a key role in supporting the growth of the Kingdom’s debt capital market.

Saudi momentum

In an interview with Arab News on the sidelines of the Fitch on Saudi Arabia event held in Riyadh, Al-Natoor lauded the Kingdom debt market for weathering global economic challenges.

“I think that by itself is something that’s very notable, because there is a lot of turbulence and there is a lot of uncertainties, and despite that, we’ve still seen the market growing,” Al-Natoor said, adding that he expected to see continued growth.

He went on to say that a range of bodies — including government, corporates, financial institutions and banks — are involved with developing the debt capital market, then funding the maturities that are coming.

“All of these are drivers, and key drivers for further growth, growth of the debt capital market,” he said.

Al-Natoor noted that several factors, including the need to diversify funding sources and the ambitious project underway in the Kingdom, are acting as key drivers of growth for Saudi Arabia’s debt capital market from the issuer side.

On investor appetite, he said: “We’re having a vibrant market in the first quarter where it shows that local investor, regional investor and international investor, of course, at varying degrees, are still interested in the market, so there is an investor appetite in that.”

He cautioned, however, that the Saudi market is not insulated from global volatility.

“Of course the appetite of the investors, maybe some uncertainties, will have a toll on the market itself. However, the actual fundamentals of the market growth are still intact, and the market is still expected to grow in the future,” Al-Natoor said.

According to Fitch, the Kingdom’s budget deficit is forecasted to widen to 5.1 percent of gross domestic product in 2025, up from 2.8 percent in 2024, with oil prices expected to average $65 per barrel.

Government debt is projected to rise to nearly 37 percent of GDP by the end of 2026, from 29.9 percent in 2024.

Foreign investor participation in government local issuances increased to 7.7 percent at the end of the first quarter, compared to 4.5 percent at the end of 2024.

About 94.2 percent of rated Saudi sukuk remain within the “A” category, with almost all issuers maintaining stable outlooks.

Looking ahead, Al-Natoor said: “We don’t have specific numbers, but we do expect that the growth momentum to continue in 2025 and 2026 maybe step further.”

He added that changes to “global scenery” could have an impact on appetite and liquidity in this area, which may lead to a “toll on the growth” of debt capital markets that lasts into next year.

Al-Natoor noted that government entities and banks are currently the primary drivers of debt issuance in Saudi Arabia.

While major corporations such as Aramco and the Public Investment Fund have also begun tapping into the debt capital market, their participation has not significantly shifted the overall market structure.

He suggested that although more corporate issuers may gradually enter the market, the dominant role of government and banks in issuance activity is expected to remain unchanged in the short to medium term.

“The actual strategy of diversifying funding is to take it down the chain from the government to banks to corporates to projects to infrastructure and so the actual long-term ambition is to involve more of these,” he said.

Al-Natoor continued: “However, over the short to medium term, we do expect that the government and the banks will play a big role.”

He added that it will take time until “the momentum goes down the chain.”

Economic resilience

In a separate interview with Arab News, Paul Gamble, head of Middle East and Africa Sovereigns at Fitch Ratings, highlighted that Saudi Arabia’s non-oil economy showed resilience despite global uncertainty.

“If you look at the experience of 2024, we saw pretty good non-oil growth at a time of really heightened geopolitical tensions in the region,” Gamble said.

Regarding Saudi Arabia’s Vision 2030 economic transformation, Gamble stressed the importance of separating reform-driven non-oil GDP expansion from government spending-driven growth.

“You have to balance the domestic reform angle — labor market reforms, social reforms, business environment reforms — against the element of non-oil growth that’s driven by government spending and GRE (government-related entities) spending,” he said.

Gamble cautioned that if oil prices remain low and government capital spending is cut significantly, it could impact private sector confidence.

He noted: “For the moment, we’re still looking for pretty healthy non-oil growth. Our forecast is 4.2 percent for non-oil growth this year for Saudi Arabia.”

Discussing fiscal pressures, Gamble said: “We’ve revised down our oil price forecast to $65 a barrel, which widened our budget deficit forecast for Saudi Arabia to 5.1 percent of GDP. That will continue to put debt on an upward trend.”

He added: “Oil prices were broadly unaffected, and metrics like tourism inflows and private sector confidence remained strong.”

In the wider Gulf region, Gamble said: “From a rating perspective, four GCC sovereigns have stable outlooks. Bahrain and Oman are exceptions.”

He explained that Bahrain faces significant fiscal challenges at current oil prices, while Oman benefits from past deleveraging efforts and non-oil economic development, supporting its positive outlook.