Saudi Arabia: Transformation and resilience

With an uncertain US outlook, a continuously delayed economic recovery in Europe and lacklustre domestic demand dragging down Chinese growth, we continue to look for compelling investment opportunities. In our view, Saudi Arabia is one such opportunity. We are seeing potential for sustainable, long-term growth there, considering the country’s rapidly transforming economy and growing capital markets.

Saudi Arabia has long been associated with oil and is, in fact, one of the top oil producers in the world. However, such dependence is risky, and the country is therefore working to transform and modernise its economy. In 2016, Saudi Arabia launched Vision 2030, an ambitious programme to diversify the Saudi economy and make it more attractive for both local and international investors. In fact, while the economy as a whole contracted in 2023—with real gross domestic product (GDP) declining by 0.8% during the year—non-oil activities saw 4.4% year-on-year growth (a longer-term trend can be seen below in Figure 1).¹ This is a direct result of the country’s focus on sectors such as tourism, entertainment, technology and renewable energy (Saudi Arabia plans to achieve net-zero emissions by 2060). Furthermore, the government is working to enhance the role of the private sector and attract more foreign direct investment (FDI), in an effort to achieve more balanced revenue and growth.

This re-balancing of the Saudi economy creates a more sustainable growth model and helps reduce vulnerability to oil price fluctuations. It is important to note, however, that the country’s robust fiscal position means that risks for significant volatility are already fairly limited. Case in point: in 2023, Saudi Arabia had a debt-to-GDP ratio of 21.8%² (compared with 122% for the United States)³, while its total reserves at the end of last year were enough to cover 17 months of imports (the corresponding measure for the United States was two months at the end of 2023).⁴

Despite its rather comfortable economic position, Saudi Arabia is looking ahead to ensure that its growth remains sustainable going forward. These ambitions are reflected in the sovereign’s positive credit rating trajectory over recent years. In fact, September saw S&P Global revise the outlook on Saudi Arabia’s A/A-1 (investment grade) rating from stable to positive, citing the country’s dynamic non-oil growth, while it maintains sustainable public finances. The accompanying statement also indicated that the rating agency expects continued investments aimed at expanding Saudi Arabia’s productive capacity, as well as a further acceleration of investments in newer industries, such as tourism.

These investments are supported by the National Investment Strategy (NIS) that was set up as part of Vision 2030 to aid the country’s economic transformation and help increase the private sector’s contribution to GDP, boost FDI, and of course, grow non-oil exports. Investments of around US$3.2 trillion⁵ should flow into various sectors—including clean technology, transportation and telecommunications—throughout the duration of the programme.

What does this mean for investors? An expanding opportunity pool backed by solid economic fundamentals, in our opinion.

The Saudi government is funding some of the massive investments needed to modernise its economy via the issuance of new debt, both eurobonds and sukuk (commonly referred to as sharia-compliant bonds). Since 2015, Saudi Arabia has increased from 18% of Gulf Cooperation Council (GCC) bond and sukuk issuance to 46% at the end of 2023.⁶

There are also technical tailwinds at play: In 2019, J.P. Morgan began to include Saudi Arabia in its Emerging Markets Bond Indexes (EMBI)—the sovereign EMBI Global and the corporate CEMBI (weightings are shown below in Figure 2)—which has supported foreign ownership of local debt and underpinned robust performance of the bonds over recent years. The country’s debt issuance and efforts at improving its capital market infrastructure have been met with increasing index representation and healthy institutional investor demand.

Saudi Arabia can boast a dynamically expanding bond market that is becoming more liquid and increasingly diversified. Saudi bonds are not only supported by the country’s commitment to balanced and sustainable growth and a modernising economy but are also helped by favourable technicals. We believe the projected increased debt issuance in Saudi Arabia should continue to draw international investor interest; compared with Saudi’s weighting in J.P. Morgan’s emerging market indexes, most investors are underweight the region.

There are also diversification benefits at play: Saudi bonds have demonstrated low correlations with major fixed income and equity indexes, making them a good complement for many client portfolios, in our analysis. Adding securities that have a low correlation to existing holdings can help improve a portfolio’s risk/return profile, potentially reducing the volatility of returns. At the same time, a large part of Saudi Arabian debt is denominated in major foreign currencies, which eliminates the foreign exchange risk present with many local currency-denominated emerging market investments.

We believe that many attractive opportunities can be found among Saudi Arabian debt securities, as these can offer not only return potential but also diversification benefits. In our view, Saudi bonds will continue to be supported by the country’s commitment to shift away from its oil dependence and modernise its economy, as well as open up its capital markets and draw international investment.