Published on 20 Nov 2019.
RAM Ratings has reaffirmed Saudi Arabia’s gAA3(pi)/Stable and seaAAA(pi)/Stable ratings on the global and ASEAN scales, respectively. The ratings are premised on the country’s narrower fiscal deficit as a result of firmer oil prices and growing non-hydrocarbon revenue, as well as a healthy balance sheet buttressed by sizeable sovereign reserves, equivalent to more than one time the country’s GDP as at end-2018. Counterbalancing these strengths are persistent geopolitical tensions and the country’s inherent reliance on oil. “The reaffirmation of Saudi Arabia’s rating with stable outlook considers the quick production recovery after attacks on its oil facilities,” explains Esther Lai, RAM’s Head of Sovereign Ratings. “Downside rating pressures from heightened geopolitical risks would arise should there be a sustained threat to growth or fiscal profile,” she further elaborates.
Despite the loss of half its production capacity in September, the country’s crude production rebounded to 9.9 mil barrels per day (bpd) in October (August 2019: 9.9 mil bpd). Although the attack had limited impact on the economy, GDP growth is likely to slow to 0.2% in 2019 (2018: 2.2%) against the backdrop of a lacklustre oil market and Saudi Arabia’s ongoing compliance with the Organization of the Petroleum Exporting Countries and its non-affiliated allies (OPEC+) agreement until March 2020. Multibillion-dollar projects under Vision 2030 such as Neom, Qiddiya, Red Sea and Amaala should be able to lift the economy, evident from the recovery of the building and construction sector which expanded by 3.0% in 1H 2019. Moving forward, the growth momentum is envisioned to primarily stem from non-hydrocarbon sectors.
The Kingdom’s current account recorded a surplus of 9.0% of GDP in 2018 owing to reduced remittance outflows and higher hydrocarbon exports. Considering the production cut by OPEC+ and stronger imports arising from non-oil industries, the surplus is envisaged to ease to 6.9% of GDP in 2019. Thanks to formidable foreign reserves amounting to 63.5% of GDP as at end-2018, Saudi Arabia’s external resilience remains intact.
Saudi Arabia’s fiscal deficit narrowed to 5.9% of GDP in 2018 (2017: 9.2%) due to a higher global oil price and steady non-oil revenue contributed by VAT and expatriate levies. Though reduced to -0.4% in 1H 2019 (1H 2018: -2.9%), the full-year fiscal deficit is forecast to widen to 6.5% on account of heavy spending commitments to facilitate the Vision 2030 reform plan. While RAM views favourably the government’s ambitious plan to balance its budget by 2023, the fiscal consolidation path may be disrupted by external headwinds amid a global economic slowdown. Furthermore, the absence of spending restraint – as observed in the past few years – has compounded the difficulty in achieving the target.
Geopolitical risks will remain significant in view of conflicts in neighbouring countries. While Saudi Arabia and Iran had made a concerted effort to reduce tensions following the attack on Saudi oil facilities in September, the recent attack on an Iranian oil tanker in the Red Sea had ratcheted up frictions. Elsewhere, Saudi Arabia’s intervention in the Yemen civil war erodes the government’s fiscal space due to elevated military expenditure, given that the former would have to deploy additional forces following the United Arab Emirates’ decision to scale down its military presence in Yemen.
Continued improvement in Saudi Arabia’s fiscal metrics, along with further economic and fiscal revenue diversification are credit positives. A downgrade, meanwhile, would be triggered by a sustained decline in global oil prices and uncontrolled expenditure growth, which results in a deterioration in fiscal metrics and a protracted depletion of sovereign reserves. A prolonged economic slump and intensified geopolitical risks will also exert pressure on the ratings.
Toh Wei Liang
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Ratings on Saudi Arabia