Fitch upgrades Saudi Arabia to 'AA-'; Outlook revised to Stable

The Outlooks are revised to Stable from Positive. The Country Ceiling is also upgraded to 'AA' from 'AA-' (AA minus) and the Short-term IDR is upgraded to 'F1+' from 'F1'.

"At today's oil prices, Saudi Arabia is earning around one billion dollars a day from oil exports, reinforcing an already strong external balance sheet and creating a buffer against future shocks," says Charles Seville, Associate Director in Fitch's sovereign team. "Official external assets are expected to be well over 100% of GDP by the end of 2008, leaving Saudi Arabia second only to China as a net public external creditor."

Saudi Arabia's main credit strengths are its very low indebtedness and large domestic and external assets. General government debt, all of it domestic, fell to 7.2% of GDP at end-2007, while the wider public sector, represented mainly by profitable state-owned firms, has little external debt.

A strong banking system also makes for low contingent liabilities from that source, notwithstanding some acceleration in credit growth this year.

Given the overwhelming dependence on oil - 90% of central government revenue comes directly from oil - a sharp drop in oil prices is the biggest economic risk. Such a fall would have to be very steep to threaten sovereign creditworthiness.

The government budgets cautiously. Based on Fitch's assumption of a $100/b average oil price in 2008, the fiscal surplus is forecast to reach 25% of GDP; the oil price that would reduce this to zero (the 'breakeven' price) is around $51/b.

Assuming a fall in the oil price to $75/barrel next year, the budget and current account surpluses would still be 13-14% of GDP with the net creditor position continuing to strengthen.

Sizeable domestic and external assets, not to mention the capacity to borrow, would allow Saudi Arabia to withstand oil prices as low as $30/bl for several years, without major spending adjustments.

Saudi Arabia's oil endowment is huge, but spread over a larger population than Kuwait ('AA-' (AA minus)/Stable) or Abu Dhabi ('AA'/Stable), resulting in a lower per capita income.

Higher revenues are allowing the government to address poverty and promote economic diversification.

Unemployment among Saudi males fell in 2007 for the first time in at least five years, to 8% from 9%, although youth and female unemployment is higher.

The government is encouraging private sector investment to create jobs for a fast-growing population, while addressing the skills mismatches that have forced the private sector to turn to foreign labour to fill most jobs.

According to the World Bank's annual "Doing Business" report, Saudi Arabia's business environment is the most favourable of any country in the GCC and compares well with other 'AA' sovereigns.

Sustained non-oil private sector GDP growth of 6% is accelerating and arguably more sustainable than in some neighbouring countries, and will help raise incomes and employment opportunities over time.

Partly as a consequence of the oil windfall and higher public spending, inflation has risen, topping 10% since April 2008.

However, inflation, which has been driven by rising rents and food prices, would have to worsen considerably to threaten the rating, given the resources available to address potential socio-political ramifications.

The establishment of the so-called Allegiance Institution in October 2006 is an important step toward alleviating political risk, with a committee of senior princes helping decide the royal succession after the accession of the Crown Prince.

The threat from domestic terrorism has been contained.