Fitch Ratings has affirmed Saudi Arabia’s long-term foreign and local currency issuer default ratings (IDRs) at AA- and revised the outlook to positive from stable.
In addition, Fitch has affirmed Saudi Arabia’s Country Ceiling at AA and its short-term foreign currency IDR at F1+.
Employment of nationals in the private sector has jumped by 60% between May 2011 and February 2013 in response to labour market reforms and access to housing finance has improved.
Fiscal and external buffers have been reinforced to among the strongest of all rated sovereigns at the same time as the government has maintained high levels of capital spending. Despite Fitch’s expectations of lower oil prices and production, fiscal and external buffers are forecast to further increase in 2013 and 2014.
Real non-oil private sector growth has remained strong, at 7.5% in 2012, illustrating some progress towards economic diversification and resilience. At an annual average of over 6%, real non-oil growth is expected to exceed growth in the oil sector for 2013 and 2014. The contribution of the non-oil sector to the economy was lifted by over 50% in revised GDP data, part of a number of improvements in data quality and availability.
Domestic political challenges are being effectively navigated. Changes to key positions in the royal family have been handled smoothly and stability has been unaffected by regional upheaval. Nonetheless, governance indicators, particularly, voice and accountability, are well below the ‘AA’ median.
“The affirmation reflects the following key rating factors including the government’s balance sheet is very strong. High oil revenues enabled further accumulation of sovereign assets and reduction in government debt in 2012. Net general government debt, at 55.3% of GDP, is the lowest of all rated sovereigns. With a general government surplus of 6% of GDP forecast for 2013, fiscal buffers will be strengthened further. A rising breakeven oil price, estimated by Fitch $76/b in 2012, is a challenge over the medium term, though if capital spending is excluded the breakeven price falls to a more comfortable USD50/b,” Fitch in a statement said.
“Saudi Arabia’s external position is extremely robust. A record current account surplus in 2012 contributed to an increase in sovereign net foreign assets equivalent to 10% of GDP. At a forecast 12.7% of GDP, 2013 will see the tenth double-digit current account outturn since 2003. There is no sovereign external debt and reported private sector external debt is low,” the statement added.
“The banking sector is liquid, well capitalized and well regulated, non-performing loans are low and loan-loss coverage is high. The macro-financial and fiscal risks arising from the banking and financial sectors are judged to be low.
“The economy remains heavily dependent on oil production and related activities. Although non-oil growth has consistently outpaced growth in the oil sector in recent years, oil still accounts for 90% of government revenues and 80% of current account receipts. Swings in the oil price pose policy challenges, though substantial buffers mean it would take a prolonged period of much lower oil prices to undermine the public and external financial positions. Oil reserves are large, production capacity stable and higher gas output is slowing the growth in domestic oil consumption. Fitch believes that very low energy prices distort the economy.”
Fitch said in its opinion, the exchange rate peg to the US dollar provides a key policy anchor even though it constrains policy flexibility. Real interest rates have been negative since 2008 despite robust economic growth, but inflation pressures are moderate and inflation declined in 2012 while private credit growth is not excessive.
“The level of public disclosure and transparency of governance, including with respect to fiscal management and assets, as well as domestic and geopolitical risks remain weaknesses relative to the AA rating category.”