- Investment Climate Review: Financial Sector Maturity and Capital Prospects in Saudi Arabia (2025-2026)

1. Macro-Economic Landscape: Pillar of Financial Stability and Investment Attractiveness

From a strategic investment analysis perspective, "Saudi Vision 2030" stands out not only as an ambitious development plan but as a successful structural framework that has radically transformed the structure of the Saudi economy. The Vision has succeeded in creating a "decoupling" of the traditional organic correlation between sovereign revenues and global energy price fluctuations. Today, the growth of non-oil activities is no longer just a secondary tributary; it represents the actual and main driver of Gross Domestic Product (GDP), significantly enhancing macroeconomic Predictability, which is the most vital and critical factor for portfolio managers and institutional investors when assessing sovereign risk and making asset allocation decisions.

Growth Paths Analysis and Monetary & Fiscal Policy Efficiency

Economic estimates and data indicate remarkable resilience for the Kingdom's economy. While the global economy faces a likely slowdown and recession risks in some major economies, the Kingdom's Real GDP is expected to grow by 4.4% in 2025, with momentum accelerating to reach 4.6% in 2026. More important than the aggregate figure is the performance of non-oil activities, estimated at around 5.0% for 2025, reflecting the efficiency of capital allocation in promising sectors and the impact of structural reforms.

On the inflation front, the Kingdom's prudent fiscal and monetary policies provide an effective "Buffer" by containing inflation at low and stable levels (2.3% for 2025 and 2.0% for 2026). These rates enhance the stability of corporate operating costs and maintain purchasing power, thereby raising the feasibility of Real Returns compared to rival emerging markets suffering from high inflation rates and exchange rate volatility.

Economic Outlook Summary (2024-2028):

This macroeconomic stability provides a solid foundation for private sector growth, enhances the attractiveness of the investment environment for both foreign and domestic capital, and supports the expansion of the banking sector, which has transitioned from a traditional "liquidity provision" phase to a phase of "financing structural transformation" and Giga Projects.

2. Banking Sector Assessment: Solvency and Liquidity Management for Transformation Financing

The Saudi banking sector is the backbone of the economic transformation process. Bank balance sheets have demonstrated absorptive capacity and resilience exceeding the initial targets of the Financial Sector Development Program (FSDP), indicating the financial system's maturity and high readiness to finance major capital projects and infrastructure.

Solvency, Asset Quality, and Liquidity:

• Asset Growth: Bank assets exceeded the SAR 4.9 trillion mark by the end of September 2025 (strong annual growth of 13%), significantly surpassing the program's target (SAR 3.5 trillion). This growth reflects "liquidity resilience" and the banking system's ability to mobilize financial resources and absorb flows required for giant projects without pressuring domestic liquidity.
• Credit Conservatism and Portfolio Quality: The Non-Performing Loans (NPLs) ratio dropped to less than 1.2%, a historic low reflecting a conservative and effective risk management credit policy that protects the system from potential "asset bubbles". This is supported by a strong Capital Adequacy Ratio (CAR) of 19.6%, providing a robust shock absorption source exceeding Basel Committee and Saudi Central Bank requirements, granting banks ample lending space.

Credit Structure and Sectoral Concentration Analysis: Corporate financing grew by 19%, with a notable concentration in real estate activities accounting for 20% of total corporate credit (21% annual growth). From an investment analyst's perspective, this concentration represents a "structural growth opportunity" driven by real and high demand for major residential and commercial projects within housing programs and Giga Projects, not merely a credit risk, as long as NPL ratios remain at current low levels. The development of debt markets will contribute in the future to alleviating the burden on bank balance sheets, allowing them more space to diversify portfolios and finance SMEs and new sectors.

3. Capital Market Dynamics: Pricing Efficiency, Institutional Maturity, and Depth

Saudi capital markets are transforming at an astonishing speed towards institutional maturity and financial depth, playing a pivotal and increasing role in enhancing financial inclusion and providing alternative and effective funding channels to traditional bank credit, completing the financing ecosystem.

• Price Discovery Efficiency: For the first time in the market's history, the share of institutional investors exceeded 50.1% of traded value in the main market (Tadawul). This fundamental shift from a retail-dominated market to an institutional one enhances "valuation rationality", reduces sharp volatility and speculation characteristic of retail markets, and provides a more stable and attractive investment environment for international and local asset managers.
• International Confidence and Foreign Flows: Foreign investor ownership reached 12.2% of total free float, with a value increase exceeding SAR 29.5 billion in just nine months. This consolidates the Kingdom's position as a "Growth Haven" in emerging market indices and reflects foreign investor confidence in economic reforms and growth prospects of Saudi companies.
• Parallel Market (Nomu): "Nomu" has emerged as an effective incubator for SMEs, where small and micro enterprises represented 61.5% of listings, exceeding FSDP targets (46%). This enhances the capital market's role in supporting entrepreneurs and providing funding for promising early-stage companies.
• Debt Market: Trading values in Sukuk and Bonds recorded a qualitative leap of 49% (exceeding SAR 27 billion). This boom represents a vital development for deepening the financial market and providing a clear sovereign and corporate "Yield Curve", helping to accurately price long-term project financing and providing diverse fixed-income investment options.

4. Investment Maturity and Digital Financial Transformation: An Enabling Environment for Growth

Current data confirms the Kingdom has transformed into a "strategic capital" destination thanks to continuous legislative and regulatory reforms, such as the "Updated Investment Law" ensuring fairness, transparency, and efficiency for investors.

• Foreign Direct Investment (FDI): The Kingdom achieved remarkable growth of 29.2%, with net inflows reaching SAR 46.5 billion in the first half of 2025. This growth, achieved amidst complex global geopolitical and economic conditions and intense competition for capital, reinforces the hypothesis that the Kingdom has become a "Safe Haven for Sustainable Growth".
• Digitization and Business Efficiency (Fintech): The share of electronic payments exceeded 79%, surpassing the 2025 target (70%) ahead of schedule. This rapid digital transformation reduces Operating Expenses (OPEX) for companies, enhances financial transparency, limits the shadow economy, and supports the growth of the promising Fintech sector.
• Investment in Knowledge Economy: The Public Investment Fund's (PIF) strategic investments in sectors like Artificial Intelligence (via partnership with "Humane"), renewable energy, and deep tech represent a qualitative shift from traditional "Rentier Economy" to "Knowledge Economy" and innovation, creating long-term value add for investors and diversifying the economic base.

5. Fiscal Sustainability and Sovereign Debt Management: Fiscal Space

The Kingdom adopts a "Counter-cyclical spending" philosophy, a sophisticated fiscal strategy ensuring continued momentum of non-oil growth and capital spending even in years of fluctuating energy prices or global economic slowdown.

• 2026 Budget (Deficit as Investment): The deficit is estimated at about SAR 165 billion (3.3% of GDP). As financial analysts, we view this deficit not as financial weakness, but as strategic "capital allocation" directed at accelerating major transformation projects (like NEOM, Qiddiya, Expo 2030) rather than financing operational consumption, aiming to shield the private sector from slowdowns and ensure business continuity.
• Public Debt Sustainability: Debt is expected to reach SAR 1,622 billion (32.7% of GDP). This ratio provides ample "Fiscal Space" for maneuvering, remaining far from global risk levels and debt rates in comparable economies (often exceeding 60-80%). The National Debt Management Center (NDMC) focuses on extending maturities and diversifying funding sources and issuance currencies to minimize refinancing risks.
• Precautionary Reserves: Maintaining government reserves at the Saudi Central Bank (SAMA) at strong levels (SAR 390 billion) represents a financial safety valve ensuring state solvency, reinforcing confidence in the stability of the Saudi Riyal peg to the Dollar, and protecting the economy from sudden external shocks.

6. Conclusion: Strategic Recommendation for Institutional Investors

Based on 2026 budget data and financial analysis of the macro and sectoral economy, we arrive at a final assessment confirming the maturity of the Saudi financial sector and its readiness to absorb major capital inflows. Investment decisions in the Kingdom today are not based solely on rapid growth opportunities and mega projects, but also on the sustainability of the state's financial position, the depth of its financial markets, and the clarity of strategic vision.

Strategic Conclusion in Three Axes:

1. Macro Stability: Successful structural decoupling from oil via stable and strong non-oil growth (5.0%) and contained, controlled inflation, reducing currency volatility and operational cost risks.
2. Market Maturity: Qualitative shift towards "institutional pricing efficiency" and increasing depth in debt and equity markets, reducing liquidity risks and providing clear Exit Options.
3. Fiscal Resilience: Smart and professional management of public debt and budget, skillfully balancing expansionary spending needed for growth with fiscal discipline needed for stability, providing a low sovereign risk investment environment.

Investment Recommendation: Saudi Arabia currently represents the most mature, reliable, and attractive destination in emerging markets for injecting strategic liquidity and direct investment, backed by advanced financial infrastructure, modern regulatory frameworks, and flexible fiscal policies ensuring sustainable long-term returns for investors looking to participate in a historic economic transformation story.