Weekly ETF Brief

Saudi Arabia: A Shelter from the Debt Storm?

The recent ratings agency downgrade of US debt highlights how developed-market issuers are facing increasing challenges from rising debt levels and increased borrowing costs. Saudi Arabia’s more benign debt position and diversifying economic outlook suggests its bonds are both a refuge and an opportunity for fixed income market investors.

27. Mai 2025 4 min read

Jason Simpson

Senior Fixed Income ETF Strategist

Developed Markets’ Vicious Circle?

Moody’s was the last ratings agency to strip the US of the highest-level debt-rating but the decision brings developed-market deteriorating debt dynamics into sharper focus. Although this downgrade is US-specific and it is more reactive than pre-emptive, it exemplifies many nations’ struggles to contain their budget deficits. The challenge of maintaining spending commitments amid already high debt levels, and the higher cost of servicing that debt, has created a negative debt dynamic which is proving hard to rebalance. Bond yields have pushed higher, particularly at the long end, as a result.

But not all regions of the world are heading in the same direction. The International Monetary Fund’s latest Fiscal Monitor¹ forecasts that by the end of the decade general government gross debt as a percentage of gross domestic product (GDP) will be at 113.3% for advanced economies but only 82% for emerging and developing economies.

Saudi Arabia is still lower, with a debt-to-GDP forecast of just under 46% by 2030.

Saudi Arabia’s Strong Growth Outlook

Saudi’s strong fiscal position has been rewarded with an upgrade to Aa3 from Moody’s, in November 2024, and A+ by S&P, in March 2025.² Its low overall debt burden is a key attraction in high-rate environment, but there are other factors at play.

Saudi Arabia’s economy is undergoing a transformation under the Vision 2030 initiative, which aims to diversify the country away from oil dependency and to drive sustainable economic growth. Saudi Arabia remains a key player in the fossil energy sector but its focus on renewable energy, infrastructure development, and financial market expansion is setting the stage for long-term stability. The IMF projects Saudi GDP growth to average 3.3% between 2025–2030, versus 1.7% for the advanced economies.

The current low oil price adds some near-term fiscal drag, with the IMF predicting a deficit-to-GDP ratio of close to 5% for 2025 and 2026.² But spending plans have been moderated and the more diversified economy is expected to shrink the deficit to 3.1% by 2030.

For investors looking to enhance returns without taking excessive risk, Saudi bonds present a compelling case:

Saudi bonds offer yields approximately 100 basis points (bps) above U.S. Treasuries, providing an attractive risk-adjusted return.
The Saudi Riyal (SAR) is pegged to the U.S. dollar, reducing currency risk — a key differentiator from other emerging market bonds, which often carry FX volatility.
With tight spreads across emerging markets, Saudi bonds offer a unique blend of developed-market stability and emerging-market yield. Following the US President’s Liberation Day announcements, spreads on Saudi Arabia dollar-denominated debt widened by 21 bps against 46 bps for the EMBIG index overall (Figure 1).

There are also some favourable longer-term dynamics that could help drive underlying demand. Since 2019, the Saudi fixed income market has expanded rapidly, driven by growing government issuance and increased foreign investor participation.

The inclusion of debt in major global indices such as the J.P. Morgan Emerging Markets Bond Index (EMBI) and the FTSE Emerging Markets Government Bond Index has increased demand for USD-denominated debt. There are hopes that local currency bonds could also start to be included in indices, which would trigger passive inflows into the market.

On the local currency side, the significant growth in Sukuk issuance (Islamic bonds), now a dominant part of the local bond market, has opened the market to Sharia-compliant investors. The Public Investment Fund (PIF), a key driver of Saudi Arabia’s economic strategy, is actively contributing to market liquidity and development, including the launch of a green bond finance framework.

Despite all of these advances, foreign ownership of Saudi bonds remains low (7.2%), presenting an opportunity for early movers before broader institutional adoption accelerates.

The Bottom Line: Why Consider Saudi Bonds Now?

Macroeconomic tailwinds: Strong GDP growth projections and economic diversification make Saudi Arabia an increasingly attractive investment destination.
Low debt and strong fiscal management: Saudi Arabia’s debt-to-GDP remains among the lowest globally, ensuring long-term credit strength.
A deepening and globally integrated bond market: Increasing foreign participation and index inclusions will likely drive further liquidity and performance gains.
Yield premium with lower risk: A competitive all-in yield for an A+/Aa3 issuer vs developed markets, and a spread over U.S. Treasuries with reduced currency volatility due to the SAR-USD peg.
ETF accessibility: Investors can combine direct investing with an efficient, diversified and transparent allocation to this opportunity through liquid and low-cost ETFs.

How to Access the Theme

Footnotes

Disclosure

Marketing Communication

For institutional /professional investors use only.

Information Classification: General Access

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