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RIYADH: Credit rating agency Moody’s has changed the outlook on the Saudi government from negative to stable.
The agency predicted the Saudi economy will return to positive growth in 2021, and the current account level will return to a surplus as the fiscal deficit shrinks in 2021, accompanied by a reduction in the level of debt in the medium term.
In a note Moody's said it expects Saudi Arabia's fiscal deficit to narrow sharply in 2021 to less than 2.5 percent of GDP from 11.2 percent of GDP in 2020 and to remain close to balance in the next several years.
Moody's and other local banks and researchers are now seeing Saudi deficit lower than the government's projections. Jadwa Investment, a Riyadh-based investment bank, said in a note yesterday that it expects the deficit to be at 2.1 percent of GDP, lower than that of Saudi Arabia's ministry of finance at 2.7 percent.
"Consequently, the government's debt burden will decline below 29 percent of GDP at the end of this year and further to around 25% of GDP by 2025 from 32.5 percent of GDP in 2020, reversing most of the pandemic-related erosion of the government's balance sheet," Moody's added.
Key Takeaways from Moody's Report
- Saudi Arabia's fiscal deficit to narrow sharply in 2021 to less than 2.5 percent of GDP from 11.2 percent of GDP in 2020
- Saudi Arabia has significant institutional and financial capacity to adjust to carbon transition proceeding at a moderate pace
- Moody's expects that some of the 2020 spending cuts will be permanent, facilitating further reductions in overall spending during 2021-23 as the pandemic-related fiscal support is gradually withdrawn.
- Saudi Arabia's debt burden remaining around 25-30 percent of GDP over the next few years compares to Moody's projections of 35-40 percent for the median of Aa-rated sovereigns and around 50 percent for A-rated peers.
A stable outlook suggests the financial position and net external assets of the Kingdom remain strong enough to support its credit rating.
The affirmation of the A1 ratings reflects Moody's view that Saudi Arabia's structural vulnerability, due to its economic and fiscal reliance on the hydrocarbon sector, will remain a constraint on the rating for the foreseeable future.
"Over the next decades, Moody's expects oil exports to produce less robust revenues at peak oil prices and weaker revenues at trough oil prices compared to historical experience because global initiatives to limit the adverse impacts of climate change will increasingly constrain the use of hydrocarbons and accelerate the shift to less environmentally damaging energy sources," it added.
The agency also noted that one of the key pillars of the change in its outlook was the government’s commitment to medium-term fiscal reforms, including the financial sustainability Program which aims to further enhance fiscal discipline, improve effectiveness of public finance management, and support the rebuilding of fiscal buffers.
This will also better align the framework with national expenditure priorities. The financial sustainability program framework between 2015-2020 contributed to the growth of non-oil revenues from less than 10 percent in 2015 to more than 18 percent in 2020, and the reduction of non-interest expenditures from 56 percent in 2015 to 53 percent in 2020.