Fitch changes Saudi Arabia's outlook to positive

Its ratings are affirmed at Long-term foreign and local currency Issuer Default ('IDR') 'A+' and Short-term foreign currency IDR 'F1'. The Country Ceiling is affirmed at 'AA-' (AA minus).

'High oil prices continue to strengthen the government's domestic and external balance sheets,' said Charles Seville, Associate Director in Fitch's sovereign team.

Further improvements in credit ratios will increase Saudi Arabia's resilience to an oil price shock and be positive for the ratings. The government is using its fiscal surplus - which reached 25% of GDP in 2006 - to pay down domestic debt, build external assets and invest in infrastructure to enhance economic and social development.

Domestic debt on a consolidated general government basis fell to just 8.4% of GDP last year, one of the lowest ratios of any rated sovereign. Saudi Arabia is also one of the very few sovereigns with no external debt.

With a large part of the fiscal surplus being invested overseas, the net public external creditor position is forecast to increase by USD40bn by end-2007 to 108% of current account receipts, a position that is surpassed only by countries rated in the 'AA' category or above, including Kuwait.

Non-reserve external assets reached USD250bn at end-2006, with Saudi Arabia being more transparent about these holdings than other GCC countries.

'Every dollar that Saudi Arabia adds to its external assets improves its ability to cope with any future oil price shock,' said Mr. Seville.

'At such high rating levels, the net external creditor position is an essential counterweight to the economy's dependence on oil, with oil and gas accounting for half of total GDP.'

A sharp fall in oil prices - however remote this might appear given the tightness of the global oil market - is still the main economic risk.

Saudi Arabia is much better positioned for such a fall than at the time of the last oil price shock in 2001.

Its per capita oil endowment is less strong than some more highly-rated countries in the Gulf, and per capita income is still only half the average for the 'AA' category. However, Saudi Arabia is the world's largest oil exporter and it can influence oil prices.

Private investment, both domestic and foreign, is being encouraged by ambitious economic reforms and development plans. The business environment also compares favourably with most peers in the 'A' category and many in the 'AA' category.

The non-oil private sector helped drive overall GDP growth to over 4% in 2006, despite flat oil output. Fitch expects a number of major projects to sustain private sector growth, even if oil prices moderate.

These investments should help diversify the economy and help reduce unemployment. In addition, the state-owned oil company is in the middle of a major programme of investment that will raise production capacity by 1.3mbd to 12.5mbd, allowing it to meet higher demand while maintaining spare capacity and confirming Saudi Arabia's pre-eminent position as an oil exporter.

King Abdullah's decision in October 2006 to create the Allegiance Institution to decide the future path of the succession alleviates domestic political uncertainty and is positive for the rating. Security has also improved since a wave of extremist attacks in 2003-04.