Assessing The Probability of Default Risk for Saudi Arabia Corporate Sector

Abstract

Saudi Arabia's corporate sector has grown rapidly, boosting its economy and regional power. However, corporate default is still becoming a risk in any growing economy. Investors, financial institutions, politicians, and stakeholders must recognize and assess this risk to make informed decisions and mitigate the risk. This paper assesses corporate default risk and Saudi Arabian listed company creditworthiness during period of 2018–2022. Principal Component Analysis (PCA) was utilized in this study in order to conduct principal component variables based on initial variables from company’s performance. After that, logistic regression was employed to identify which principal component variables has most effect on a company’s credit risk. Based on the empirical results, the study determines the default predictors (variables) of Saudi Arabian listed companies. The straightforward nature of the model makes it accessible to investors and creditors, even for individuals without prior statistical or information technology experience. It can be utilized to assess the level of commercial credit risk posed by listed companies in Saudi Arabia. Furthermore, since most listed companies are required to submit annual financial statements, the data collection process for incorporating into the model is relatively straight forward. However, for future research, it is recommended to explore the use of credit risk scores developed by credit rating agencies or financial data provider platforms like Bloomberg or Reuters, as this may enhance the accuracy and robustness of the predictive model. Looking at logistic regression result, the study suggests that company’s profitability ratios, liquidity ratios, activity ratios are the most affecting factor in company credit risk.