Published on 04 Jan 2019.
RAM Ratings has reaffirmed Saudi Arabia’s gAA3(pi)/Stable/gP1(pi) and seaAAA(pi)/Stable/seaP1(pi) ratings on RAM’s global and ASEAN scales, premised on the country’s stronger economic performance, improved credit metrics as a result of firmer oil prices, and sizeable sovereign reserve holdings amounting to 134.6% of GDP as at end-2018. “Saudi Arabia’s fiscal reforms seen in the implementation of VAT and energy price adjustments bode well for reducing its reliance on hydrocarbon revenue and susceptibility to oil price volatility,” says Esther Lai, RAM’s Head of Sovereign Ratings.
Saudi Arabia’s central government deficit narrowed further to 4.6% of GDP in 2018 (2017: 9.3% deficit) on the back of stronger global oil prices and a steady non-hydrocarbon revenue contribution from VAT. Nonetheless, the government’s projected 4.2% fiscal deficit for 2019 will be a challenge given considerable volatility in global hydrocarbon price and output ahead that might hamper fiscal revenue, along with heavy spending commitments towards economic reforms, social welfare and civil service remuneration. Saudi Arabia’s ability to stay committed to the Fiscal Balance Programme (2017-2023) hinges greatly on the sustained implementation of fiscal reforms and its willingness to contain expenditure growth when faced with revenue uncertainties.
Spurred by a slight uptick in non-hydrocarbon sectors and increased oil production, Saudi Arabia’s GDP growth is projected by RAM to come in at 2.0% in 2018 after a 0.9% contraction in the previous year. While non-oil sectors may come under pressure from continued energy price reforms and an expatriate levy hike, the impact on these sectors is moderated by targeted government transfers to households. The country’s hydrocarbon production in 2019 will likely be maintained at around the previous year’s level, constrained by the output arrangement between the Organisation of Petroleum Exporting Countries (OPEC) and major non-OPEC producing countries (collectively referred as OPEC+) which was renewed in December 2018. RAM estimates Saudi Arabia’s GDP growth in 2019 to inch up to 2.2%, supported by firmer growth in non-oil sectors compared to the oil sector.
The country’s current account surplus is anticipated to advance to 8.6% of GDP in 2018, driven by steady recovery in the oil price and higher production. The surplus is envisaged to ease to an estimated 4.5% in 2019 owing to the OPEC+ production arrangement. Saudi Arabia’s external resilience is anchored by foreign reserves to the tune of a formidable 72.3% of GDP in 2017 – which provide robust financing of current account purchases of up to 25 months and three times coverage of external debts – despite reserves having declined in recent years due to fiscal deficit funding. The country’s net external creditor position stayed strong at 81.2% of GDP in 2017, reflecting significant assets held abroad.
Saudi Arabia’s proximity to insurgency-ridden neighbouring countries heightens geopolitical risks. The country’s military intervention in the Yemen civil war along with Arab allies comes at the expense of a higher security risk and heftier military expenditure. Hostilities between Saudi Arabia and Iran remain, with the former deeply suspicious of the latter’s role in instigating regional instability. That said, Saudi Arabia’s strategic ties with most of the Gulf states and long-time ally, the US, moderate these risks. While the diplomatic rift between Qatar and the Arab quartet of Saudi Arabia, the United Arab Emirates, Bahrain and Egypt is still unresolved, the economic impact of the dispute is negligible. The recent death of a Saudi journalist at the country’s consulate in Turkey has led to immense international scrutiny of Saudi Arabia, although implications for the country remain limited at this juncture.
Cheong Kah Weng
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Ratings on Saudi Arabia