Saudi Arabia’s fiscal position remains strong: Moody’s
Saudi Arabia’s A1 rating and stable outlook are supported by a strong fiscal position,
the Kingdom’s large oil and gas reserves at low production costs, and high levels of external liquidity, said a report issued by Moody’s Investors Service.
According to the report, credit challenges include the economy’s high dependence on oil, a rigid government spending structure and government revenues that are vulnerable to oil price volatility.
The rating also incorporates an element of geopolitical risk driven by regional instability.
“Although the fall in oil prices pushed Saudi Arabia’s budget balance into large deficits, eroding the government’s reserves and prompting the government to issue bonds on the international market for the first time in 2016, the country’s fiscal position remains strong,” said Steffen Dyck, a senior credit officer at Moody’s.
Moody’s anticipates a mild real gross domestic product (GDP) contraction of 0.2 percent in 2017 due to lower oil production, following the Organization of the Petroleum Exporting Countries (OPEC) agreement reached in late November.
While fiscal consolidation will continue, Moody’s forecasts a sizeable budget deficit of 10.5 percent of GDP in 2017, narrowing to 9.2 percent in 2018.
Over the medium-term, Moody’s forecasts that the government’s revenue sources will become increasingly diversified, with oil and gas revenue declining from 72 percent of revenues in 2015 to 54 percent by 2020.
With sizeable fiscal deficits expected to remain the norm, Saudi Arabia’s gross funding requirements have also increased. While previously the domestic banking sector was able to provide ample liquidity to meet the government’s financing needs, the authorities have begun to incorporate more external debt.
The stable outlook reflects Moody’s view that risks to Saudi Arabia’s credit profile are broadly balanced. Risks to the outlook relate to the high level of exposure to volatile oil prices and the hydrocarbons sector more broadly.
Potential credit-positive developments include the full implementation of planned fiscal and economic reforms that should lead to smaller deficits, and a lower than currently projected debt burden.
Although higher than expected oil prices could also help to reach these outcomes, it would be more positive if improvements were the result of sustainable structure reforms.