(MENAFN- Capital Intelligence Ltd) Rating Action

Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed Saudi Arabia’s Long-Term Foreign Currency Rating (LT FCR) and Long-Term Local Currency Rating (LT LCR) at ‘A+’. At the same time, CI Ratings has affirmed the sovereign’s Short-Term (ST) FCR and ST LCR at ‘A1’. The Outlook on the ratings remains Positive.

Rating Rationale

The ratings reflect Saudi Arabia’s very strong external liquidity position, underpinned by ongoing current account surpluses, a strong net external creditor position, as well as good access to international capital markets. The ratings also take into consideration the country’s strong public finances, supported by low central government debt and limited gross financing needs. The ratings remain supported by large fiscal and external buffers which shield the sovereign from external shocks, as well as sizeable oil reserves and a sound banking sector.

CI views the authorities’ commitment to continue implementing reforms as part of Saudi Vision 2030 as a positive factor which could – in the medium to long term – assist in diversifying the economy, as well as reducing the dependence on hydrocarbons and the vulnerability of the public and external finances to international oil price volatility. Reform efforts have so far helped to boost confidence in the Saudi economy, raise the female employment rate, and increase the country’s attractiveness as a regional tourist destination. Reforms are also expected to reduce the country’s reliance on fossil fuels by encouraging green energy investments.

Recent progress notwithstanding, the ratings remain constrained by the comparatively limited diversification of the economy and budget revenue structure, as well as by moderate-to-high policy risk and substantial geopolitical risks.

The public finances remain strong despite the decline in hydrocarbon revenues as a result of OPEC+ cuts. The central government budget posted a deficit of 1.1% of GDP in the first three quarters of 2023, compared to a surplus of 3.6% during the same period of 2022. Meanwhile, central government debt remained low at 24.8% of GDP in the first nine months of 2023, compared to 23.8% at year end-2022. CI expects the budget deficit to average at 1.4% of GDP in 2024-25, provided fiscal discipline is maintained and the government presses ahead with planned measures to address revenue and expenditure rigidities. Despite the increase in the budget deficit, liquidity risk remains low, with gross financing needs estimated at 5.2% of GDP in 2023. CI notes that the balance of the general reserve stood at SAR407.7bn (10.2% of GDP) at end-September 2023. Moreover, the government has secured a syndicated loan of USD11bn (1% of GDP) in November this year to finance the budget deficit and maintain the level of assets in the general reserve.

Risks to the fiscal outlook are material, however, given downside risks to the global economy (and therefore hydrocarbon demand), higher than expected and prolonged production cuts by OPEC+, and the tightening of global financial conditions. Other risks stem from a potential weakening of fiscal discipline and the large financing costs of mega projects under Saudi Vision 2030. CI notes that the direct impact of tighter local and global monetary policies on the public finances is likely to be manageable given the relatively low level of government debt and very low interest expense, with the latter expected to average 1.7% of budget revenue in 2023.

External liquidity remains very strong. The current account surplus stood at 2.9% of GDP in H1 23, compared to 7.6% in H1 22. The current account is projected to remain in large surplus, averaging 5.3% of GDP in 2023-25. Gross external debt is expected to remain low at 28.3% of GDP (78.3% of current account receipts) in 2023.

The ratings continue to be supported by the sovereign’s large fiscal and external buffers. The most important fiscal buffers are government deposits at the Saudi Central Bank (SCB) which stood at SAR409.8bn (10.2% of GDP) in October 2023, compared to SAR685.3bn (16.5%) in October 2022. Saudi Arabia’s external debt repayment capacity continues to benefit from the large stock of foreign assets under the management of the SCB, which declined to USD426.5bn in October 2023 (from USD460.4bn in December 2022) but continues to exceed the country’s gross external debt stock. The economy’s net external asset position (narrowly defined and excluding the sizeable foreign assets of the Public Investment Fund; PIF) is expected to remain high at 17.5% of GDP at end-2023.

Economic strength remains moderate, supported by the broad-based expansion of non-hydrocarbon sectors. CI expects the economy to post minimal growth of 0.03% in 2023, compared to growth of 8.7% in 2022, due to the contraction in the hydrocarbon sector linked to OPEC+ cuts. Further ahead, we expect real GDP growth to pick up, supported by government initiatives aimed at diversifying the economy via large investments in the non-oil economy and legal and regulatory reforms to improve the business environment and support the green energy transition.

The economy’s reliance on oil export proceeds is still an important rating constraint given the potential volatility in oil prices. These proceeds are the major source of government revenues and also act as a significant catalyst for non-oil economic activity since their size strongly impacts the government’s fiscal stance and domestic credit growth. The ratings are also constrained by significant geopolitical risks as a result of Saudi Arabia’s involvement in the war in neighbouring Yemen. Furthermore, we view policy risk as moderate-to-high due to limited transparency regarding policy-making processes and a decrease in the overall predictability of domestic and foreign policy in recent years.

The ratings remain supported by the country’s sizeable oil reserves – Saudi Arabia commands over 16% of proven global oil reserves. In addition, the ratings are supported by the financial soundness of the banking sector, which benefits from a low reliance on external funding and good capital buffers.

Rating Outlook

The Positive Outlook indicates a better than even chance that that the ratings will be upgraded within the next 12 months and is based on our expectation that the public and external finances will remain strong in the medium term, supported by reasonable reform efforts to diversify revenues and improve the budget structure.

Rating Dynamics: Upside Scenario

Although unlikely, the ratings could be upgraded by more than one notch in a year’s time if structural reforms are much deeper than envisaged and, as a result, the prognosis for economic and fiscal performance over the medium term is much stronger than currently expected, with the reliance on hydrocarbon revenues greatly reduced.

Rating Dynamics: Downside Scenario

The Outlook could be revised to Stable or the ratings lowered if regional and global geopolitical tensions escalate, or in the event of a significant weakening in the public finances and external liquidity, possibly driven by an unexpected sharp decline in hydrocarbon prices beyond our projections and/or a significant decline in expenditure discipline.

Contact

Primary Analyst: Dina Ennab, Sovereign Analyst, E-mail: ...
Committee Chairperson: Morris Helal, Senior Credit Analyst

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The ratings, rating outlook and accompanying analysis are based on public information. This may include information obtained from one or more of the following sources: national statistical agencies, central banks, government departments or agencies, government policy documents and statements, issuer bond documentation, supranational institutions, and international financial institutions. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings, but does not audit or independently verify information published by national authorities and other official sector institutions.

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This rating action follows a scheduled periodic (semi-annual) review of the rated entity. Ratings on the entity were first released in December 1996. The ratings were last updated in June 2023. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure.

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Unsolicited Credit Rating

With Rated Entity or Related Third Party Participation: No
With Access to Internal Documents: No
With Access to Management: No

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