MANAMA: S&P says that its negative outlook on Saudi Arabia reflects agency’s view that Saudi Arabia’s general government fiscal position is weakening.
“We could lower the ratings over the next two years if the government’s liquid assets fell well below 100% of GDP or its overall fiscal performance significantly weakened by our estimates. The ratings could also come under pressure if domestic or regional events compromised political and economic stability.
“The ratings could stabilize at current levels if the combination of policy choices by the Saudi authorities and external economic conditions preserve the government’s exceptionally large liquid asset position close to current levels, which provide the government with an exceptional buffer during periods of economic or financial shocks.
On Feb. 9, 2015, Standard & Poor’s Ratings Services revised its outlook on the Kingdom of Saudi Arabia to negative from stable and affirmed its ‘AA-/A-1+’ long- and short-term foreign and local currency sovereign credit ratings.
As a “sovereign rating” (as defined in EU CRA Regulation 1060/2009 “EU CRA Regulation”), the ratings on Saudi Arabia are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar.
Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is the recent sharp drop in international oil prices.
“Prices for crude oil in spot and futures markets have fallen by more than 50% since June 2014, leading Standard & Poor’s to revise down its oil price assumptions significantly over 2015-2018. When we last reviewed Saudi Arabia, in December 2014, we expected Brent oil prices to average $80 per barrel (/bbl) in 2015 and $85/bbl in 2015-2018. We now assume an average Brent oil price of $55/bbl in 2015 and $70/bbl in 2015-2018.
“Saudi Arabia derives about 40% of its GDP, 90% of government revenues, and 85% of exports from the hydrocarbons sector. We view Saudi Arabia’s economy as undiversified and vulnerable to a steep and sustained decline in the oil price, notwithstanding government policy to encourage non-oil private sector growth. We find that the non-hydrocarbon sector relies to a large extent on government spending, funded by hydrocarbon revenues and downstream, hydrocarbon activities.
Alongside our lower oil price assumptions, our fiscal projections also take into account the government’s 2015 budget, which suggests a general government deficit of about 6% of GDP in 2015. In addition, we include the new King’s recently announced Saudi Arabian riyal (SAR) 110 billion (US$29 billion) off-budget spending package, representing 4.5% of GDP, which we understand is to be disbursed over 2015-2017. In our view, the government may face sustained fiscal deficits over the period to 2018. Financing these deficits and the recently announced spending package may result in a pronounced decrease in the government’s net asset position or an increase in the government’s currently very low debt burden.
Sustained high oil prices over the past few years have helped bolster financial buffers, accumulating government liquid assets that we estimate will average about 111% of GDP in 2015-2018. In our view, this level of assets significantly offsets the concentration risk related to the economy’s hydrocarbon dependency. However, we could reassess our view that the government has an exceptional buffer to offset most economic or financial shocks should liquid assets fall below 100% of GDP.
“The large public investment program (just over 30% of all central government spending is capital expenditures) could provide the Saudi authorities with fiscal flexibility to react to the deteriorating terms of trade and concomitant detrimental government revenue trends, although at the cost of slower progress in implementing the official economic diversification strategy.
“We understand that Saudi Arabia is the oil producer with the largest estimated amount of spare oil production capacity globally. In our view, this could provide it with an additional layer of fiscal and external flexibility that other oil producers don’t have.
“King Abdullah passed away on Jan. 23, 2015. The succession of his 79 year old half-brother, King Salman, has proceeded smoothly. King Salman has followed the wishes of his predecessor in naming his half-brother, Prince Muqrin, as crown prince and next in line to the throne. The new king has also adhered to the strictures of the Allegiance Council established in 2007 to formalize the procedure of appointing a crown prince once a new king ascends to the throne.
“King Salman has named his nephew, interior Minister Mohamed bin Nayef, as deputy crown prince and second in line to the throne.
“However, we believe that this framework will face a crucial test when the scepter is passed from a son of King Abdulaziz Al-Saud, who established the Kingdom in 1932, to the next generation of rulers–potentially the newly appointed deputy crown prince. So far, only the sons of King Abdulaziz have ruled after him. We continue to view succession as an element of uncertainty.
“The spending package announced by King Salman is in line with the practice of newly appointed Saudi kings but comes at a time when public finances are already strained. The package includes a bonus of two months’ salary to be paid to current and retired state employees, while students and state benefit recipients will also receive a two-month bonus.
“In our view, Saudi Arabia is an absolute monarchy in which decision-making is highly centralized with the king and the ruling family. We find that this could make future policymaking more difficult to predict. Political institutions are still at an early stage of development compared with those of non-regional peers in the AA rating category.”
“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 (estimated at $87/bbl in 2015 by the International Monetary fund), diversification away from the oil sector is in our view a more pressing issue in Saudi Arabia relative to some other GCC countries.
“We now estimate trend growth in real per capita GDP at about 1% over 2009-2018, using 10-year weighted-average growth as our measure. This is still on a par with peers that have similar GDP per capita but at the bottom end of the typical 1%-4% range.
“Over 2015-2018, we expect Saudi Arabia’s net liquid external assets (net of external debt) will remain in a strong position, averaging about 200% of current account receipts (CARs). The country’s external liquidity has weakened since our last review due to our expectation of weaker growth in CARs, with gross financing needs averaging 90% of usable reserves and CARs by our estimate.
“Given the Saudi riyal’s peg to the U.S. dollar, we view monetary policy flexibility as limited. The long-standing currency peg helps to anchor the population’s inflation expectations but binds Saudi Arabia’s monetary policy to that of the U.S. Federal Reserve.”