Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed Saudi Arabia’s Long-Term Foreign and Local Currency Ratings of ‘AA-‘ and its Short-Term Foreign and Local Currency Ratings of ‘A1+’. The Outlook for the ratings is ‘Stable’.
Saudi Arabia’s credit ratings are underpinned by the prudent management of the country’s substantial oil endowment during the last four years of high international energy prices. This, in turn, has resulted in the accumulation of substantial financial reserves to shield the economy from shocks, including prolonged oil price declines.
The central government budget has remained in surplus in 2014 and the government’s balance sheet appears to be sound, characterised by sizeable financial assets and minimal debt. Fiscal pressures are likely to increase in light of the recent sharp decline in international oil prices and – in the absence of significant expenditure adjustment and assuming an average oil price of USD60 per barrel – CI expects the budget to post a deficit in the region of 1.7% of GDP in 2015. However, near-term financing risks are negligible given the likely appetite for government securities from local banks and pension funds and, more so, the large fiscal buffer in the form of deposits held with the Saudi Arabian Monetary Authority (SAMA), currently equivalent to more than 55% of GDP.
The balance of payments position is comfortable and official foreign reserves offer substantial protection against external shocks. The current account surplus is expected to be about 15% of GDP in 2014 and is expected to remain in surplus – albeit declining over the coming years. Official foreign assets under SAMA’s management amounted to USD742 billion at end-October 2014 (equivalent to about 95% of estimated GDP in 2014), and are almost ten times as large as the country’s gross external debt stock.
Although the balance of risks started to tilt to the downside in view of the latest decline in oil prices and the forecast of subdued oil prices for the upcoming two years, CI expects real output growth to increase by an average of 4.4% during 2014-16, underpinned by robust non-oil activity and the continuation of double-digit private sector credit growth. GDP per capita is expected to exceed USD25,000 in 2014 and is expected to grow by an average of 2.4% during the 2015-16 period. The banking system is very sound and currently poses little risk to the public finances.
Notwithstanding the sound financial position, the sovereign’s ratings remain constrained by structural fiscal shortcomings – in particular the over reliance on oil and the narrow non-oil tax base, as well as institutional weaknesses, socioeconomic challenges and limited fiscal transparency.
The public finances are somewhat vulnerable to oil price shocks on account of the high dependence on oil revenue (which accounts for about 90% of total revenues) and a narrow tax base (3% of total revenues), undermining the strength of the fiscal balances in case of prolonged sharp declines in oil prices.
Separately, with the population increasing by more than one million every two years, job growth remains a key challenge for the authorities. Although labour market reforms and measures to correct the status of expatriates have contributed to a 21% increase in the number of Saudi nationals employed in the private sector, the unemployment rate for nationals was relatively high at 12% in 2013 and is unlikely to decline significantly – if at all – in the intermediate term.
In CI’s opinion, government operations and policymaking structures lack adequate transparency and accountability, particularly in comparison with more advanced economies; the quality of governance indicators is also generally weaker. On the external front, Saudi Arabia is exposed to the same geopolitical event risk that affects the ratings of all Gulf sovereigns, including potential threats to trade, infrastructure and security from a military conflict in the Middle East region. Saudi Arabia is also exposed to succession risks.
The Outlook for the ratings is ‘Stable’. This indicates that Saudi Arabia’s ratings are likely to remain unchanged over the next 12 months as the impact of the substantial decline in oil prices on the fiscal balance and external accounts, in view of the high concentration risks, is offset by the country’s strong shock absorption capacity, substantial financial assets and limited indebtedness.
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Rating Committee Chairman
Senior Credit Analyst