RIYADH: Saudi Arabia and the UAE are set to account for most of the Gulf’s private-credit growth as economic diversification and infrastructure spending create demand for financing beyond banks, Moody’s Ratings said. 

The Gulf Cooperation Council private-credit market is currently worth about $6 billion, compared with $1.8 trillion globally, but is expanding rapidly from a low base, the rating agency said in its latest report. 

Economic diversification, large infrastructure needs and financing gaps among small and medium-sized businesses are driving demand for non-bank capital. Moody’s said the market’s growth will be concentrated in Saudi Arabia and the UAE, supported by regulatory reforms, institutional capital formation and government spending. 

The trend comes as GCC economies, led by Saudi Arabia, pursue diversification to reduce their reliance on hydrocarbons and expand private-sector activity, driving demand for alternative sources of capital. 

Regional tensions and disruptions to oil and trade flows are also making financing more challenging, while Gulf governments continue to fund major diversification and infrastructure projects. Saudi Arabia’s Vision 2030 investment plans are putting pressure on bank balance sheets, creating opportunities for alternative lenders even as banks remain the main source of corporate credit. 

“Private credit growth in the GCC is likely to be concentrated in Saudi Arabia and the UAE, supported by regulatory reforms, institutional capital formation and unabated government spending,” Moody’s said. 

The region’s sovereign wealth funds, which collectively manage about $5 trillion, provide a substantial pool of potential capital for the asset class, dwarfing the size of the local private-credit market. 

Tony Hallside, CEO of STP Partners, a Dubai-based alternative asset manager, said the opportunity for private credit in the region was clear, but warned that the quality of expansion would be more important than its pace. 

“Private credit can make a useful contribution where it addresses genuine financing gaps, particularly among SMEs and mid-sized businesses, or provides borrowers with structures that banks are less suited to offer. It should complement the banking system rather than simply compete for the same borrowers,” Hallside said. 

Demand builds beyond banks 

Economic transformation is creating structural demand for non-bank lending. Although banks remain central to financial intermediation, private credit is expanding rapidly from a low base and is particularly well placed to address financing gaps for SMEs and sectors requiring flexible structures.  

Sovereign wealth funds are also supporting private-credit growth. Their long investment horizons, international expertise and local origination capabilities are expected to deepen the domestic ecosystem and help GCC-focused platforms attract regional and international investment.  

Private credit is likely to complement rather than challenge banks. Banks retain dominant deposit franchises and corporate relationships, while private lenders can offer faster execution, greater structural flexibility and longer-duration financing.  

Moody’s said conservative leverage, strong covenant packages, transparent valuations, sector diversification and credible restructuring capabilities will determine whether the expansion remains credit positive. 

“For that to remain credit-positive, private credit managers will need to maintain conservative leverage, strong covenant protection and thorough borrower assessment as more capital enters the market,” said Hallside.  

He noted that diversification across sectors and borrowers will also be important, given the risk of lending becoming concentrated among the same large projects and companies already served by banks. 

“In a young market, transparent valuations and the ability to monitor, restructure and recover loans are especially important. Growth will be sustainable when capital is matched with sound underwriting and managers can demonstrate how they would manage a full credit cycle,” Hallside added.  

Saudi Arabia creates demand, UAE structuring 

Moody’s expects Saudi Arabia and the UAE to account for most private-credit growth in the medium term. Saudi Arabia generates the largest volume of prospective lending opportunities, while the UAE provides the legal, regulatory and operational infrastructure through which much of the region’s private-credit activity is likely to be organised and managed.  

Saudi Arabia’s Vision 2030 investments, relatively tight banking-system funding conditions and persistent SME financing gaps support the strongest demand outlook in the region. 

The UAE, meanwhile, has emerged as a structuring and fund-formation hub, with the Dubai International Financial Center and the Abu Dhabi Global Market providing established legal and regulatory frameworks for private-credit funds. 

Hallside said Saudi Arabia and the UAE are developing complementary roles in the region’s private-credit market. Capital and expertise organized through the UAE can support financing opportunities across the region, including in Saudi Arabia, he said, while the quality of each investment will depend on strong local origination and credit assessment. 

“Shariah-compliant structures will also remain an important part of serving regional demand,” Hallside added. 

Saudi Arabia targets fiscal consolidation 

Separately, Moody’s said Saudi Arabia’s wider-than-expected 2026 deficit would be followed by fiscal consolidation in 2027, making spending discipline an important factor in the Kingdom’s borrowing and fiscal decisions. 

The credit rating agency said a larger near-term deficit alone does not change its central assessment of Saudi Arabia, with the Kingdom’s established fiscal strengths continuing to support its credit profile.  

Moody’s affirmed Saudi Arabia’s Aa3 rating with a stable outlook in May, citing the Kingdom’s economic fundamentals, non-oil growth and resilience to regional geopolitical risks. 

The Saudi government on Sept. 30 raised its estimated 2026 deficit to SR245 billion, or 4.9 percent of gross domestic product, from SR165 billion, or 3.3 percent, in the original budget. Moody’s said the revision reflected spending exceeding the original budget rather than lower aggregate revenue.  

For 2027, the government expects the deficit to narrow to SR191 billion, or 3.6 percent of GDP, while revenue is forecast to rise 1 percent to SR1.202 trillion. Spending is projected at SR1.39 trillion.  

“Planned fiscal consolidation in 2027 supports our view that prudent fiscal management will remain a key anchor for spending and borrowing decisions,” Moody’s said. 

The Saudi government expects real GDP to contract 3.6 percent in 2026 before rebounding 12.8 percent in 2027. Moody’s forecasts a 3.3 percent contraction followed by 8.5 percent growth, reflecting weaker non-oil activity and a more moderate recovery. 

Earlier this month, the World Bank projected that Saudi Arabia’s economy would contract 2 percent in 2026 before rebounding 7.9 percent in 2027, assuming the regional conflict subsides by the end of 2026.