Saudi Arabia’s Ratings Affirmed; Outlook Remains Positive

(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 LT 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, 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 in reducing 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.

Notwithstanding recent progress, 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, substantial geopolitical risks, limited fiscal transparency (for the ratings category), and increasing off-budget spending.

The public finances remain strong despite hydrocarbon revenues declining due to prolonged OPEC+ cuts, which are due to last until the end of 2024. The central government budget posted a deficit of 2.0% of GDP in 2023, compared to a surplus of 2.5% in 2022. Meanwhile, central government debt remained low at 26.2% of GDP in 2023, compared to 23.9% at end-2022. CI expects the budget deficit to average at 1.9% of GDP in 2024-26, assuming an average oil price of USD75.8 per barrel and provided that the government presses ahead with planned measures to address revenue and expenditure rigidities. CI notes that central government revenues will continue to benefit from large performance-linked dividends from Saudi Aramco (calculated on the company’s free cash flow).

Revenue mobilisation continues to improve thanks to reforms implemented under Saudi Vision 2030. Non-hydrocarbon revenues increased by 11.4%, in 2023 and accounted for 37.7% of total revenues compared to 32.4% in 2022.

Despite the increase in the budget deficit, liquidity risk remains low, with gross financing needs estimated at 4.9% of GDP in 2024. CI notes that the balance of the general reserve stood at SAR391.9bn (9.5% of GDP) at end-March 2024. Debt management policy remains proactive, with the government benefitting from its good access to capital markets. In May 2024, the government issued USD5bn sukuk (0.5% of GDP), which was four times oversubscribed, while earlier in January, SAR45bn bonds (1.1% of GDP) with medium- to long-term maturities were issued to finance the budget deficit and maintain the level of assets in the general reserve. In 2023, the government pre-paid about USD10bn of debt maturing in 2024-26 in order to improve the time to maturity of its debt portfolio and significantly reduce principal repayments during this period.
Risks to the fiscal outlook are material, however, and stem from the possibility of prolonged and deeper-than-projected production cuts from OPEC+, a tepid increase in oil demand, and higher-than-projected supply from non-OPEC members. Other risks stem from the increase in off-budget spending and the large financing costs of mega projects under Saudi Vision 2030. CI notes that the direct impact of tight local and global monetary policies on the public finances is modest given the relatively low level of government debt and very low interest expense, with the latter expected to average 1.4% of budget revenue in 2024.

CI notes that off-budget spending has increased significantly since 2020, with the mega projects under Saudi Vision 2030 mainly being financed from the Public Investment Fund’s (PIF) own sources and direct borrowing. The PIF tapped the international markets twice recently, issuing USD5bn eurobonds and an inaugural GBP650mn bonds. CI estimates place the PIF’s loans and borrowings at around 9% of GDP in 2023; we expect these to increase in the short to medium term ahead of Expo 2030 and the 2034 World Cup.

External liquidity remains very strong, although the current account surplus has declined, in part due to prolonged oil production cuts. The surplus fell to 3.2% of GDP in 2023 from 13.5% in 2022, and is expected to be around 0.5% in 2024. Gross external debt is low and is expected to remain so in 2024 at a projected 29.3% of GDP (81.9% of current account receipts).

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 SAR391.9bn (9.5% of GDP) in March 2024. Saudi Arabia’s external debt repayment capacity continues to benefit from the large stock of foreign assets under the management of SCB, which increased to USD444.7bn in April 2024 (from USD436.9bn in December 2023), and 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 PIF) is expected to have remained high at 20.8% of GDP at end-2023.

Economic strength remains moderate, reflecting continued – albeit declining – dependence on hydrocarbon production. Despite the broad-based 4.4% growth in the non-hydrocarbon sectors, real GDP contracted by 0.8% in 2023, compared to growth of 8.7% in 2022. This is attributable to a 9% contraction in oil production given OPEC+ cuts. Looking ahead, we expect real GDP to gradually pick up in 2024-26, 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.

Reflecting continued reform implementation and robust growth in the non-hydrocarbon sectors, labour market segmentation is gradually declining. According to the Statistics department, total unemployment – including Saudi nationals and expats – declined to 4.4% in 2023, from 4.8% in 2022, while unemployment among Saudi nationals decreased to a record low 7.7% in 2023, compared to 8% in 2022. Female participation in the workforce exceeded Saudi Vision 2030’s target of 30%, reaching 35.5% in 2023. Meanwhile, the employment of Saudi nationals in the private sector increased by 4.8%.

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 revenue 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 and the regional spillovers of the war in Gaza. 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. This is based on our expectation that central government debt will remain low and the public and external finances strong in the medium term despite prolonged hydrocarbon production cuts, supported by reasonable reform efforts and the maintenance of large fiscal and external buffers.

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. The Outlook could also be revised to Negative in the event of a significant decline in expenditure discipline or increase in contingent liabilities as a result of larger than projected off-budget expenditures and GRE’s debt.

Contact

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

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