Amid confusing signals — a costly war on Yemen and ambitious social reforms at home — Saudi Arabia has seen its sovereign ratings affirmed but economic performance slapped with a ‘negative’ outlook by CI Ratings.
Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency announced that it has affirmed Saudi Arabia’s Long-Term Foreign and Local Currency Ratings at ‘A+’ and its Short-Term Foreign and Local Currency Ratings at ‘A1’. At the same time, CI Ratings has revised the Outlook for the ratings to ‘Negative’ from ‘Stable’.
The change in the Outlook to ‘Negative’ primarily reflects the continued decline in the level of the foreign assets under the management of the Saudi Arabian Monetary Authority (SAMA). The revision of the Outlook also reflects the continued impact of low international oil prices on the fiscal and external balances. The ‘Negative’ Outlook takes into account the relatively subdued prospects for economic growth in the short to medium term.
The Kingdom’s foreign assets remain on a downward trend, declining by 8% in the first ten months of 2017 to US $493 billion, compared to US $536 billion at end 2016 and to a record high of US$732 billion at end 2014. The decline reflects the government’s use of its foreign assets to meet its external financing needs and bridge the large fiscal gap. CI expects the downward trend in foreign assets to continue in the short to medium term, reaching US $400 billion by 2019. Nonetheless, Saudi Arabia remains a large net external creditor, with official foreign assets alone covering the country’s moderate stock of gross external debt (public and private) more than four-fold and providing over 20 months of import coverage.
Real output growth slowed to 1.7% in 2016 and is expected to stagnate in 2017, reflecting the impact of low oil prices and lower government spending on key sectors of the economy. In 2018-19 the economy is projected to post small growth averaging 1.4%. The banking system remains sound and currently poses low risks to the sovereign.
The Saudi government is continuing to pursue its national transformation plan, Saudi Vision 2030, despite continued delays in implementing key pillars. The plan serves as a blueprint for the post-hydrocarbon era and aims to reduce the economy’s reliance on hydrocarbon through initiating a public investment fund that would invest in different economic sectors.
The size of the fund is expected to reach US $2 trillion by 2030 and is also expected to broaden the government’s revenue base by generating investment income. While the proposed reforms should help to reduce economic concentration in the long term, short to medium-term goals appear unattainable and implementation risks remain considerable in view of current global economic conditions and the continued delays in creating the necessary legal framework.
The budget position remains weak, CI Ratings said, but the central government deficit is expected to decline to a still sizeable 7.8% of GDP in 2017, compared to 13.5% in 2016, due to lower current and capital spending. CI expects the deficit to decrease further next year, albeit to a still high 7.2% of GDP in 2018 and to 5% of GDP in 2019, provided that the government introduces VAT and implements further fiscal consolidation measures. CI does not expect the recently launched NEOM initiative to have any substantial impact on the public finances within the rating period.
Government debt is increasing – albeit from a low base – and is expected to reach 17% of GDP by end 2017, up from 5.8% two years ago. The ratio of government debt to GDP is expected to reach around 25% by 2019, driven by fiscal financing needs. With increased debt issuance and the drawdown of government deposits in the banking system (by 13.9% in the first ten months of 2017) the government’s net creditor position is on a descending path, although it is currently at a comfortable level of about 8% of GDP (down from 52% of GDP in 2013).
Political and geopolitical risk factors remain unchanged. However, any increase in the domestic and/or external political risk factors stemming from the recent arrests of prominent key figures in the Saudi royal family and in the business community, and/or the increased involvement in the war in Yemen could increase investor risk perceptions and dampen economic prospects.
The sovereign’s ratings remain largely constrained by structural fiscal shortcomings (including overreliance on oil revenues, a limited tax base, and rigid expenditures), as well as institutional weaknesses, socioeconomic challenges, and limited fiscal transparency.
On the other side, the sovereign’s ratings are supported by the sheer size of the hydrocarbon reserves and still high level of external financial assets despite the continuous decline.
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Rating Committee Chairman
Senior Credit Analyst