Gulf Cooperation Council (GCC) private credit, while small at present, is entering a period of rapid expansion, says Moody's Ratings in a report on the growth of private credit in the region.
Economic diversification, large infrastructure requirements and financing gaps among small and medium-sized enterprises (SMEs) are creating demand for non-bank capital.
Announced investment plans far exceed domestic banks' lending capacity, which has made bank funding scarcer and costlier, although conditions are now easing. This financing gap is also driving a wider push from the government and regulators to deepen domestic capital markets by broadening financing options, with private credit emerging as a key alternative instrument.
Moody’s says that private credit growth is likely to be concentrated in Saudi Arabia and the UAE, supported by regulatory reforms, institutional capital formation and unabated government spending. Private credit is likely to complement the banking sector by offering more flexible, bespoke and longer-duration financing solutions.
Risks
Moody’s says that the key credit risk is looser underwriting as capital supply increases, while concentration could build if direct lending is focused on sectors and customers already financed by banks.
Nonetheless, the current GCC market benefits from conservative documentation, concentrated institutional capital and limited competition, although these risk mitigants may weaken as the asset class scales. Evidence from developed markets shows how an influx of capital can compress spreads, increase leverage and weaken covenant protection.
It also highlights two distinct vulnerabilities: deterioration in borrower credit quality and liquidity mismatches in vehicles that invest in illiquid assets and offer periodic redemptions. The GCC market currently has modest exposure to the latter risk as private credit remains largely supported by institutional investors through closed-end vehicles, while semi-liquid funds remain nascent.
However, limited experience through a full credit cycle means that underwriting, valuations and recovery capabilities have not yet been tested at scale. Competition from both international and domestic managers could weaken credit standards over time, as more global managers establish a local presence and seek deployment opportunities.
Manager track record, portfolio diversification, origination and monitoring discipline, as well as restructuring capability will, therefore, matter more than headline fundraising or targeted returns.
Sector expertise will also be key, as origination is likely to be concentrated in areas supporting economic diversification. Real estate and infrastructure exposures, for example, may carry construction, refinancing, asset value and counterparty risks, while logistics, renewable energy and digital infrastructure remain sensitive to trade disruption, cost overruns and technology-related uncertainty.
Credit concentration is a further consideration. Because bank lending and private credit origination are likely to expand in the same diversification-driven sectors, growth in the asset class would add financing capacity without necessarily broadening the range of exposures across the system. Overlap could extend to individual borrowers, given the limited universe of large companies and diversification projects. While modest at its current scale, concentration could build relatively quickly as the asset class grows. Other risks for the asset class include uneven regulatory frameworks across the region, valuation opacity, evolving insolvency regimes and geopolitical uncertainty.
“Ultimately, the viability of private credit as an alternative funding source for the region will depend less on the pace of growth and more on maintaining strong credit standards, conservative leverage, robust covenant protections, diversified exposures and restructuring expertise,” said Moody’s.
Background: Insurers face the various risk implications too because private credit is becoming a more established part of their investment strategies as they seek to enhance yield, diversify portfolios, and improve asset-liability duration matching.