The Saudi Balance Sheet Jenga: Infrastructure Lending at Full Tilt?

Loan-to-Deposit Ratios are climbing, FX dynamics are shifting, but infrastructure lending remains firmly in motion.

By Udit Garg, Associate Director

udit.garg@tribeig.com

The global economy has faced quite the stress test lately, enduring an unusual series of exogenous shocks from COVID-19 pandemic to major military conflicts and more recently, policy-driven trade skirmishes. This run of disruptions has dialed up volatility in the macroeconomic environment, making the world feel a bit like an economic pinball machine.

While infrastructure finance in the GCC had been somewhat shielded, thanks largely to its status as one of the region’s favourite growth-inducing policy lever (besides oil price / production volumes), recent macro shifts are now unmistakably rattling the cage. Rapid hikes in interest rates, tighter liquidity and shifting lending appetites have pushed project financing costs upward, constricted lending and driven a noticeable pivot in Saudi banks’ lending currency preferences.

Yet, despite these speed humps, the GCC’s project finance machine keeps humming along. This article examines how macroeconomic turbulence over the past year—particularly rate spikes and liquidity squeezes—has reshaped infrastructure lending dynamics, with a special focus on Saudi banks.

Saudi Banks Under Pressure: Loan Growth Outpaces Deposits

Saudi banks have had a blistering run over the past year, expanding loan books far faster than their deposit bases, a dynamic that’s putting liquidity under serious pressure. In 2024, the rated Saudi banks saw their loans surge by over 14%, but deposits lagged behind, rising just 7.9%. This mismatch pushed the sector’s loan-to-deposit ratio (LDR) to a striking 104%, effectively deploying every available local riyal. This marked the first time in years that the aggregate LDR for Saudi banks breached the critical 100% threshold, with the steepest jumps seen at heavyweights like SNB, SAB, and SAIB. By contrast, UAE banks, just across the border, played it cooler: loans rose 12.6%, nearly matched by deposit growth at 10.7%, keeping the UAE’s average LDR comfortably around 76%. The divergence is vividly visible in the below chart.

Liquidity Squeeze: A Closer Look at Saudi Funding Challenges

The liquidity squeeze in Saudi Arabia is undeniable. Driven by strong demand for financing mega-projects, corporate expansions, and mortgages aligned with Vision 2030, KSA witnessed annual loan growth of 14%. Al Rajhi Bank and Riyad Bank led the charge, boosting their corporate loan books by a staggering 30% and 25% year-on-year from their 2023 levels, respectively.

However, deposits haven’t kept pace, largely due to a slowdown in government-related entity (GRE) deposits—which have an outsized influence, comprising about one-third of total deposits. Government and GRE deposits that buoyed banks through 2022 began leveling off as oil revenues moderated and after further cuts to the SAMA repo rates in Q4 of 2024. Saudi banks faced a rare SAR 27 billion (or roughly 1%) deposit drop in Q4 2024. The first such dip since 2019 and this was despite SAMA’s introduction of a new deposit auction platform that helped bolster bank deposits by over SAR 200 billion. This auction platform lets GREs to park funds with banks offering the most attractive returns, rather than leaving them idle in central bank accounts. Although it is likely that this deposit decline might reflect seasonal budgeting and tax-related GRE outflows.

This compelled banks to look outward to bridge the funding gap. Major banks like—Al Rajhi Bank, Riyad Bank, Banque Saudi Fransi, Arab National Bank, Saudi Investment Bank, and Gulf International Bank—all turned to sizable debt issuances to fill the void raising over USD 11 bn in debt markets, an approx. 30% increase Y-o-Y.

While tapping into debt markets aligns neatly with SAMA’s broader strategic vision for a maturing banking sector, this borrowing spree pushed Saudi banks’ foreign liabilities up by 50% year-on-year to SAR 373 billion by August 2024 and SAR 411billion at the end of 2024. For the first time ever, Saudi banks collectively registered negative net foreign assets by mid-2024, meaning they owed more abroad than they owned. This a stark indicator of heightened external dependency. See the orange line in the chart below highlighting the growth of foreign liabilities over foreign assets of the Saudi banks (RHS axis).

The scramble for liquidity has reshaped lending behaviour. Saudi lenders are now strongly favouring Saudi Riyal (SAR) lending over U.S. dollar denominated loans. For instance, NEOM’s SAR 10 billion credit facility in April 2024 was arranged by nine domestic banks, with no USD tranche. Local banks now favour structuring large corporate and project loans in riyals, leaving USD portions to international lenders, ECAs, and the bond market. This shift improves profitability, reduces FX risk, and aligns with authorities’ goal of developing a deeper SAR yield curve.

Local vs. International Lenders: Who’s Stepping Up?

With regional banks’ lending surge testing their funding limits, international banks might seem poised to step into the gap. Indeed, global and regional lenders remain active, but they too face constraints from higher rates and internal pressures. The past year has emphasized the divide between Saudi domestic banks and international institutions.

Saudi banks, notably SNB, Riyad Bank, Saudi Awwal Bank, Banque Saudi Fransi, and Alinma, remain key players in Vision 2030 lending. Yet they’ve grown cautious, reducing commitments and some preferring syndication roles to manage scarce balance-sheet space.

Foreign development institutions (like Korea’s KDB and Germany’s KfW) and ECAs have consistently supported projects tied to exports or contracts, though they’re limited by ticket size. Global banks (Natixis, MUFG, SCB) and regional Arab banks (FAB, ADIB, ADCB, NBK) also remain involved, leveraging healthier liquidity. UAE banks, benefiting from robust deposit growth, actively finance regional projects, while Kuwaiti and Qatari banks selectively participate.

Despite this international participation, no player has significantly undercut pricing, as all lenders have adjusted spreads upward due to global conditions with clear pricing differentiation/competitiveness between infrastructure sub-sectors.

Implications and Market Rebalancing

Both local and foreign lenders are charging more, but Saudi banks faced the crunch first and hardest. Conversely, international banks gain increased negotiating power, extracting better terms as their USD liquidity becomes essential (given SOFR/SAIBOR base rate pricing advantage persists, together with ability hedge longer tenors under SOFR). This shift marks a healthy market recalibration, promoting greater financial discipline and prudent risk management among Saudi banks.

Moreover, increasing capital market funding (sukuk/bonds) diversifies funding sources and imposes market discipline. Fitch anticipates that the Loan-to-Deposit Ratio (LDR) and funding gap for Saudi Arabian banks will rise further by 2025, with these banks expected to issue over $20 billion in dollar-denominated bonds. Crucially, Saudi government backing and SAMA liquidity support provide reassurance, ensuring continued market resilience. GCC banks collectively are likely to issue dollar denominated bonds over $30 billion, reinforcing integration with global capital markets.

While international lenders have stepped up to fill some liquidity gaps, drawn in by Saudi Arabia’s strong track record of successful projects and the robust contractual and security frameworks established by experienced procurement entities like SPPC and SWPC, the bulk of funding responsibility still falls on domestic banks, particularly for projects led by newer or less established procurement bodies. Regulators, therefore, face the critical task of carefully balancing lending demand against local funding capacity, not only in terms of available riyals or dollars but also considering the human capital constraints within Saudi banks.

Looking Ahead: Adjusting to the New Financing Landscape

Despite tighter liquidity, rising costs, and currency adjustments, the GCC infrastructure financing ecosystem remains robust. The fundamental drivers economic diversification, strong state balance sheets, and essential projects persist.

Looking forward, anticipated declines in SOFR and SAIBOR, stable oil prices, and initiatives like SAMA’s deposit auctions are poised to ease pressures. These developments underline resilience and adaptability, offering a promising outlook for GCC infrastructure financing.