Fitch Ratings has upgraded Saudi Arabia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘A+’ from ‘A’, with a stable outlook. The credit rating agency cited Saudi Arabia’s successful efforts to diversify its economy away from oil.
This is a testimony of the success of Saudi Vision 2030 launched by HRH Crown Prince Mohammed bin Salman. It sets out plans to develop “a vibrant society, a thriving economy, and an ambitious nation.” At the macroeconomic level, Saudi Arabia aims to increase non-oil government revenues from SAR 163 billion ($43.5 billion) to SAR 1 trillion ($267 billion) by 2030 and raise the share of non-oil exports in non-oil GDP from 16% to 50% over the same period.
One of the Kingdom’s major arms in implementing the vision is the Saudi Public Investments Fund (PIF). It supports the diversification of the Saudi economy and aims to contribute SAR 1.2 trillion to Saudi Arabia’s non-oil GDP and create 1.8 million jobs by the end of 2025.
PIF is working towards this goal by activating growth opportunities for strategic and vital sectors, including investment in the tourism sector in Saudi Arabia in line with Vision 2030, which aims to raise the contribution of this sector to the GDP to more than 10% by 2030.
Fitch said that the upgrade of Saudi Arabia’s ratings reflects its strong fiscal and external balance sheets, with government debt/GDP and sovereign net foreign assets (SNFA) considerably stronger than both the ‘A’ and ‘AA’ medians and significant fiscal buffers in the form of deposits and other public sector assets.
It indicated that the upgrade also assumes an ongoing commitment to gradual progress with fiscal, economic, and governance reforms. Oil dependence, weak World Bank governance indicators, and vulnerability to geopolitical shocks remain relative weaknesses, although there are some indications of improvement in these factors.
Saudi Formidable External Finances
Fitch said that Saudi foreign reserves excluding gold remained broadly stable in 2022, at $459 billion, as financial account outflows in the form of investments and deposits abroad offset the substantial current account surplus (13.6% of GDP; $150 billion).
The agency indicated that Saudi Arabia has one of the highest reserve coverage ratios among Fitch-rated sovereigns at 18 months of current external payments.
“We forecast reserves to decline marginally to $445 billion in 2023-2024, as the current account surplus falls close to 7.5% of GDP in 2023 and 4% in 2024, due to lower oil revenue, but that outward investments by large institutions such as the Public Investment Fund (PIF) and pension funds moderate.”
Fitch forecast SNFA to remain above 55% of GDP in 2023-2024, large relative to the ‘A’ median (3.1% of GDP) and the ‘AA’ median (33% of GDP), although substantially lower than regional peers in the ‘AA’ rating category. SNFA includes central bank foreign reserves as well as the foreign assets of pension funds and the PIF, minus the foreign liabilities of the government, central bank, and the PIF.
Low Government Debt
Saudi Arabia’s Gross government debt/GDP declined to 23.8% in 2022, half the ‘A’ median of 51%.
The agency forecast that government debt/GDP will increase to 24.7% in 2023 and rise but remain below 30% in 2024-2025. Government deposits at the Saudi Central Bank, comprising the government’s current account and the fiscal reserve, increased to SAR463 billion (11.1% of GDP) in 2022.
Fitch indicated that this put net government debt at just 12.7% of GDP. Furthermore, pension funds held around 4.5% of GDP (SAR184 billion) of domestic government debt in 3Q22 and could increase their holdings if needed.
Budget Close to Balance
Fitch believes that the Saudi budget surplus to reduce to balance in 2023, from 2.5% of GDP in 2022, as lower oil prices (Brent crude at $85/barrel from $99/barrel in 2022) and lower production (10.14m b/d) offset higher non-oil revenue.
Moreover, they assume that after a sharp increase in 2022, total spending will decline by 1.9% . This implies spending will be 2.5% above budget, while we also expect non-oil tax revenue to be higher than budgeted.
Accordingly, they forecast a budget deficit of 1.2% of GDP in 2024, assuming average oil prices fall to $75/b, partially offset by higher production. Non-oil revenue will increase, but not sufficiently to outweigh lower oil revenue, while total spending will be contained, up by around 1% overall, helped by lower capex. They also assume the VAT rate remains at 15%.
Saudi Non-Oil Economy Gains Traction
Fitch Ratings projects real growth of 5% in the Saudi non-oil private sector in 2023 (5.4% in 2022), supported by higher government capex, investments by the PIF including giga projects, robust credit growth, ongoing development of retail and entertainment sectors and employment gains among Saudis and ex-pats.
Moreover, In 2024-2025, they forecast non-oil private sector growth to slow closer to 4%, with the dampening impact of lower forecast oil prices set against ongoing economic reforms and high public sector investment spending.
However, Fitch indicated that Saudi Oil dependence remains a rating weakness. Oil revenue will account for around 60% of total budget revenue in 2023-2024 (albeit down from 90% 10 years ago) and oil GDP 30% of total nominal GDP. They estimated that a $10/bbl movement in oil prices would change our budget forecast by just over 2% of GDP.
Gradual Improvement in Fiscal Structure
Fitch Ratings expects gradual improvements in fiscal structure, despite the deterioration in 2022 and a higher spending profile for 2023-2025. In 2022, the fiscal break-even oil price increased, to $86/b, and the non-oil primary deficit to non-oil GDP widened.
However, in large part, government decision-making appears to have been strategic, reflecting a policy balance between supporting Vision 2030 projects and responding to higher inflation on the one hand and remaining fiscally prudent. For example, the wage bill (44% of total spending) increased by just 3.5%, minimal growth in real terms.
Furthermore, they forecast the fiscal break-even oil price to fall to $76/b in 2025 (higher than our previous projection below $70/b) and for the non-oil primary balance to non-oil GDP to resume a trend of improvement, narrowing to 23% in 2025 from 31% in 2022 (and 41% in 2016).
Saudi Vision 2030 Risks and Returns
Rising public-sector spending outside the budget, including on ambitious giga projects, and the potential for a higher debt of state-owned and government-related entities (GREs), as Saudi Arabia presses ahead with its national investment strategy as part of Vision 2030, is a medium-term risk to the sovereign’s balance-sheet strengths, in Fitch’s view.
However, it may bring returns, in the form of sustained higher non-oil GDP growth and job creation to meet the expanding national labor force.
Political Risks Ease
Relatively weak governance scores continue to constrain the rating and risks from geopolitical tensions persist, in Fitch’s view.
Nonetheless, governance is improving with social and economic reforms and efforts to bolster effectiveness across government institutions. Iran’s progress with its nuclear program and missile capabilities continues to present regional risks that could impact Saudi Arabia and the conflict in neighboring Yemen remains unresolved.
However, steps towards Saudi-Iranian détente, which is partly driven by the Kingdom’s desire to reduce risks from Yemen, hold the hope of reduced regional risks.
Regarding ESG, Fitch indicated that Saudi Arabia has an ESG Relevance Score (RS) of ‘5’ for Political Stability and Rights and 5[+]’ for the Rule of Law, Institutional and Regulatory Quality, and Control of Corruption.
These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Saudi Arabia has a medium WBGI ranking at the 48th percentile with low scores for Voice and Accountability, and Political Stability and Absence of Violence constraining the average.
PIF is the Backbone of the Saudi economy
Saudi Crown Prince Mohammed bin Salman said in early 2020 that the Public Investment Fund will expand its assets under management by more than 100% to around 4 trillion riyals ($1.1 trillion).
PIF’s assets under management recorded around 1.5 trillion riyals by the end of 2020, the Crown Prince has revealed.
He added that over the past few years, the Saudi sovereign wealth fund has achieved remarkable economic and investment milestones, highlighting that the PIF has doubled its assets.
During the Future Investment Initiative conference, the Crown Prince said that Saudi Aramco will offer more stocks in the coming years, and the prospects will be allocated to the sovereign fund and re-invested domestically and globally.
According to the US-Saudi Business Council, “The PIF receives its funding through four major sources: capital injections from the government, assets transferred to it from the government, loans and debt instruments, and returns on its investments and holdings. Other potential funding sources include the sale of companies in its portfolio to the private sector and direct listings/initial public offerings (IPOs) of PIF companies on Tadawul.”
The council said that analysts expect Saudi Arabia to be a regional IPO leader in 2021, with more than 15 potential offerings planned.
The sovereign wealth fund also receives funding from the Saudi Central Bank. In 2020, the central bank transferred around $40 billion to the fund.
According to Seznec Saudi Aramco remains one of the sovereign wealth fund top funders, as the fund sold assets to Aramco. The oil giant bought the fund’s 70% stake in Saudi Basic Industries Corporation in June 2020 worth about $70 billion.
In November 2022, His Royal Highness Crown Prince Mohammed bin Salman bin Abdulaziz, Prime Minister and Chairman of the Council of Economic and Development Affairs (CEDA), Chairman of PIF, announced the masterplan for King Salman International Airport which will boost Riyadh’s position as a global logistics hub, stimulate transport, trade and tourism, and act as a bridge linking the East with the West. The airport project is in line with Saudi Arabia’s vision to transform Riyadh to be among the top ten city economies in the world and to support the growth of Riyadh’s population to 15–20 million people by 2030.
King Salman International Airport is expected to be one of the world’s largest airports covering an area of approximately 57 km2, allowing for six parallel runways and including the existing terminals named after King Khalid. It will also include 12km2 airport support facilities, residential and recreational facilities, retail outlets, and other logistics real estate. The airport aims to accommodate up to 120 million travelers by 2030 and 185 million travelers by, with the capacity to process 3.5 million tons of cargo, by 2050.
In January 2021, the Saudi sovereign wealth fund launched the Jeddah-based Cruise Saudi Company, in a bid to establish a strong Saudi tourism industry.
The PIF also established the Soudah Development Company which plans to attract two million annual visitors to the Kingdom and create 8,000 jobs by 2030, in the company’s luxury eco-resort in the mountainous Asir region.
Not only tourism, the PIF also invested in finance, renewable energy, and infrastructure, with a focus on digital-led projects.
Accordingly, the fund acquired a 50% stake in the e-commerce giant Noon, which launched in Saudi Arabia in 2017.
Concerning the energy and utilities sectors, the Saudi sovereign wealth fund established Tarshid (National Energy Services Company), the National Water Company, as well as the New Solar Energy Plan 2030. It also raised its stake in ACWA Power for renewable energy from 33.35% to 50%.
The fund also entered into the mining sector, as it has a majority stake in the Saudi Arabian Mining Company (Ma’aden). In line with the Saudi 2030 Vision, the PIF launched the Saudi Investment Recycling Company (SIRC) aiming to recycle 85% of the kingdom percent of the country’s industrial and hazardous waste by 2035.
SIRC aims to contribute $10 billion to the Saudi economy, attract $.16 billion of foreign investments, as well as create more than 23,000 new jobs.
The sovereign wealth fund plays an integral role in the Saudi defense industry as it owns the Saudi Arabian Military Industries (SAMI) and has added Saudi Information Technology Company (SITE, a cybersecurity firm) and The Helicopter Company (THC, a domestic helicopter manufacturer) to its defense/security holdings.
Public Investment Fund in eyes of credit rating agencies
International Credit rating agencies believe that the Public Investment Fund will play a major role in the Saudi Arabian economic recovery.
In a recent report, credit rating agency Moody’s said that PIF will boost investment spending in domestic projects and make up for the reduction in public budget capital spending.
The report explains that these investments would support economic diversification and joint private-public investments, as part of Saudi Vision 2030.
The Saudi sovereign wealth fund’s 2021-2025 strategy, aims to spend at least $40 billion yearly on average on domestic projects, which make up around 4.5% of Saudi Arabia’s projected GDP for 2021.
Similarly, Standards & Poor’s credit rating agency said that investments by Saudi Arabia’s Public Investment Fund will support credit growth among companies in the Kingdom.
The agency cited the fund’s investment plans as one of the drivers of corporate credit growth, especially in the construction and construction-related sectors.
“This will offset the gradual lifting of government support aimed at easing the coronavirus pandemic economic impacts,” S&P said in a recent report.
Recently, the Saudi central bank said it had extended a deferred payment program to support private sector financing for an additional three months until June 30 as part of measures to cushion the negative economic repercussions of the pandemic.
It also said a guaranteed financing program had been extended for another year until March 14, 2022, to support small and medium enterprises.
Standard and Poor’s expected that domestic credit growth in Saudi Arabia, the biggest Arab economy, would stay strong in 2021 and the next year after a 14% year-on-year increase in 2020.
The credit rating agency said that this expected growth will be partially due to rising demand for housing from Saudi nationals, which has boosted mortgage growth.
“Over the next couple of years, we forecast that mortgage portfolios will expand by about 30% a year,” S&P added.