Future of Saudi economy about policy, not prices says S&P chief

Market reforms are more important than the oil price in determining the trajectory of the Saudi economy, according to S&P. (Reuters)

LONDON: Saudi Arabia’s prospects depend more on government reforms becoming “irreversible” than the price of oil, said Moritz Kraemer, global chief rating officer for S&P in an interview with Arab News.
He said: “If oil went to $100 per barrel again there would be a risk of undermining the reform momentum — and helping those campaigning to maintain the previous status quo.
“We don’t think the oil price will determine the fate of the country. The policies that are chosen will determine future economic stability,” said Kraemer.
He added that S&P’s forecast for the average price of crude in 2018 was $60 a barrel, falling to $50 a barrel in 2019, underlining how important it was that KSA reduced its dependence on crude to secure prosperity.
Kraemer said today’s Saudi Arabia contrasts with to an earlier era when there “had been so many internal, opaque checks and balances that you really never had any policy momentum developing in any direction. There was a sort of stagnation in policy-making.”
Looking at recent reform initiatives in KSA, Kraemer noted that the objectives were very demanding, but would most likely be met in the timeframe laid out. However, what was really important was “the direction of travel,” namely bringing in more private capital, to develop the country, “whether that happens slower or faster is less important than the irreversibility of the process,” he said.
The Kingdom should maintain growth of spending, and one way of trying to achieve this was by getting the private sector more involved in service delivery, health and education and also infrastructure.
Asked whether investor appetite for Saudi debt was good, Kraemer said yes, and this was seen when the government issued bonds for the first time in 2016 — with the $17.5 billion offering oversubscribed four times.
But the domestic capital market still needs developing. The take-up of Saudi government bonds was largely, but not exclusively, by foreign investors. The local market was relatively undeveloped compared to countries such as Turkey and the UAE, he said.
To remedy matters, Kraemer said regulation needed to be “more helpful,” although the authorities were working on improvements.
The assignment of credit ratings to Saudi companies would help domestic corporates to raise debt both at home and abroad — but for this to happen KSA groups would have to disclose more details about their affairs, he said.
In the context of Vision 2030, Kraemer flagged up significant financing needed for infrastructure projects. “We foresee a lot of activity linked to PPPs (public private partnerships). Funding would be partly covered by the banks, but some would have to come from debt markets,” said Kraemer.
With interest rates rising, he was relaxed about the effect on KSA. During S&P studies, the Kingdom regularly showed up as least vulnerable to the threat of outflows of foreign capital in a rising interest rate environment.
Turkey was among the countries most at risk, he said, but Qatar also had issues.
He said: “If you look at what Qatar needs to borrow compared to how much foreign exchange reserves they have, and how much current account receipts they have, it looks quite weak. They need to pay and borrow more than KSA — not in absolute terms, but relative to their export receipts.”
On the other hand, Qatar had substantive external investments, and “a hugely liquid portfolio of foreign bonds and shares that they could run down if there was a squeeze, so they were well buffered.”
Saudi debt would not reach anywhere near something that “could be described as alarming,” according to S&P forecasts, he said.
According to the World Bank’s 2018 outlook on the Middle East and North Africa, growth in the region is expected to jump to 3 percent in 2018 from 1.8 percent in 2017.
Growth in Saudi Arabia was forecast to accelerate to 1.2 percent in 2018 from 0.3 percent in 2017, while in Egypt, growth is anticipated to pick up to 4.5 percent from 4.2 percent last year.
In a report at the end of 2017, S&P said its stable outlook on KSA was based on the expectation that the Saudi authorities would continue to take steps to consolidate public finances and maintain government liquid assets close to 100 percent of GDP over the next two years.
It added: “We think the risks emanating from recent shifts in Saudi Arabia’s political power structures and societal norms, alongside various regional stresses, are balanced by the possibility that these structural reforms could empower Saudi citizens and make Saudi Arabia more attractive to investors over the medium term.”
But S&P said its ratings could come under pressure if it observed a significant increase in domestic or regional political instability as a result of the increasing centralization of power.