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Fitch upgrades Saudi Arabia credit rating to ‘A+’, with stable outlook

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.

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 include 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 believesthat 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% yoy. 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 expats. 

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.

Futhermore, 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 labour force.

Political Risks Persist

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 programme and missile capabilities continues to present regional risks that could impact Saudi Arabia and the conflict in neighbouring 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.

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