Standard & Poor’s Ratings Services revised its outlook on the Kingdom of Saudi Arabia to stable from positive. At the same time, the AA-/A-1+ long- and short-term foreign and local currency sovereign credit ratings on the Kingdom were affirmed.
“We indicated in June this year that we could revise our outlook on Saudi Arabia to stable if we anticipated that weaker economic growth or sustained lower oil prices could lead to GDP per capita that was not commensurate with an improved assessment of economic structure and growth prospects, one of the five key factors that form the foundation of our sovereign credit analysis. We base our outlook revision on our view that, although real economic growth remains relatively strong, we think Saudi Arabia is unlikely to achieve sufficient levels of nominal income to raise the ratings over the next two years. We assume a Brent oil price of $80 per barrel (bbl) in 2015 and $85/bbl in subsequent years which will place pressure on the GDP deflator because Saudi Arabia derives about 45% of its GDP from the hydrocarbons sector. We now estimate GDP per capita at $23,400 in 2014-2017, down from our June assumption of $25,600. Trend growth in real per capita GDP, which we measure using 10-year weighted-average growth, amounts to about 2% during 2008-2017. This is in line with peers that have similar GDP per capita,” S&P in a report said.
“The ratings are supported by the very strong external and fiscal positions Saudi Arabia has built up over many years. By managing high oil revenues prudently, the general government has retired virtually all of its debt, generating additional fiscal space for countercyclical policies. We estimate the general government’s net asset position at 118% of GDP on average during 2014-2017. Over the same period, we expect Saudi Arabia’s external debt, net of liquid external assets, will remain strong, averaging about 210% of current account receipts (CARs). The country’s external liquidity is similarly strong, with gross financing needs averaging 78% of usable reserves and CARs by our estimate.”
“We note that government reforms are resulting in some improvements to the highly segmented labor market. Saudi nationals’ share of private sector employment increased to 15% in 2013 from 13% in 2012, and women’s share of total employment increased to 9.4% from 7.7%. However, the unemployment rate remains high for Saudi nationals, standing at 11.7% compared with 0.2% for non-Saudis, leading to an overall 5.6% rate in 2013,” it added.
“We think uncertainty remains regarding whether the private sector can generate enough sufficiently attractive jobs for to absorb the expected significant inflow of Saudi nationals into the labor market in the coming years. Saudi demographic data show that about 40% of the population is younger than 20 years of age. Moreover, given that the employment of Saudi nationals generally leads to higher labor costs than for expatriates, unit labor costs could rise and then weaken overall economic competitiveness.”
“We view Saudi Arabia’s economy as undiversified and vulnerable to a sharp and sustained decline in the oil price, notwithstanding government policy to encourage non-oil private sector growth. The hydrocarbon sector accounts for about 44% of GDP. However, we find that the non-hydrocarbon sector relies to a significant extent on government spending (funded by hydrocarbon revenues) and downstream hydrocarbon activities. About 85% of exports and 90% of government revenues stem directly from the hydrocarbons sector. In its October 2014.”
The International Monetary Fund indicated that Saudi Arabia’s fiscal breakeven oil price will rise to $106/bbl in 2015 from $98/bbl in 2014 and $89/bbl in 2013. This is the oil price necessary to balance the government’s budget, all other things remaining equal.
Nevertheless, based on our oil price assumptions and our view that the government will adjust fiscal policy to incorporate a much lower oil price than in recent years, we expect the deterioration in Saudi Arabia’s fiscal balance to be contained. The large public investment program (just over 30% of all central government spending is capital expenditures) affords the Saudi authorities with significant fiscal flexibility to react to the deteriorating terms of trade and concomitant detrimental government revenue trends. We expect Saudi Arabia to achieve a broadly balanced fiscal position in 2014-2017, following an average surplus of 10% of GDP in the previous four years.
“We see Saudi Arabia’s significant gas and oil revenues as supportive of the current ratings. Sustained high oil prices over the past few years have helped bolster financial buffers, maintaining government liquid assets at more than 100% of GDP and significantly offsetting the concentration risk related to the economy’s hydrocarbon dependency.”
According to our estimates, based on the 2014 BP Statistical Review of World Energy, Saudi Arabia’s annual production of both oil and gas–about 5 billion barrels of oil equivalent (boe)–could be maintained for the coming 66 years, given its 320 billion boe in estimated reserves. However, in terms of years of hydrocarbon production at current levels, Saudi Arabia is surpassed by other Gulf Cooperation Council (GCC) countries: Qatar (106), Kuwait (91), and the United Arab Emirates (81). As a result, alongside the high share of hydrocarbons in nominal GDP and exports, and a relatively high fiscal breakeven oil price, in our view, diversification away from the oil sector is a more pressing issue in Saudi Arabia relative to some other GCC countries. We understand that Saudi Arabia is the oil producer with the largest estimated amount of spare oil production capacity globally. In our view, this endows it with an additional layer of fiscal flexibility not enjoyed by other oil producers.”