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+”. The revision of the Outlook to Positive from Stable reflects the following factors:
• Tangible progress in addressing key potential sources of social stress. Employment of nationals in the private sector has jumped by 60 percent between May 2011 and February 2013 in response to labor 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 nonoil private sector growth has remained strong, at 7.5 percent in 2012, illustrating some progress towards economic diversification and resilience. At an annual average of over 6 percent, real nonoil 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 percent in revised GDP data, part of a number of improvements in data quality and availability.
The affirmation reflects the following key rating factors:
• 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 percent of GDP, is the lowest of all rated sovereigns. With a general government surplus of 6 percent of GDP forecast for 2013, fiscal buffers will be strengthened further. A rising breakeven oil price, estimated by Fitch $ 76 a barrel in 2012, is a challenge over the medium term, though if capital spending is excluded the breakeven price falls to a more comfortable $ 50 per barrel.
• 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 percent of GDP. At a forecast 12.7 percent 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 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 nonoil growth has consistently outpaced growth in the oil sector in recent years, oil still accounts for 90 percent of government revenues and 80 percent 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.
• In Fitch's 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 Positive Outlook reflects the following risk factors that may, individually or collectively, result in a upgrade of the ratings by one notch:
• Further progress in tackling unemployment and diversifying the economy in ways that remove distortions without causing undue disruption to the private sector.
• Measures to stem the rise in the breakeven oil price, especially addressing the growth in current spending and domestic oil consumption.
The current rating Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating downgrade. However, future developments that may, individually or collectively, lead to a stabilization of the Outlook.
• A prolonged period of oil prices well below current levels that materially erode substantial fiscal and external buffers.
• Spill over from regional conflicts or a domestic political shock that threatens stability or impacts on key economic activities.
The Ratings and Outlooks are sensitive to a number of assumptions.
• Fitch's economic and fiscal projections are based on a forecast of average Brent crude prices of $ 105 a barrel in 2013 and $ 100 a barrel in 2014. Oil prices of below $ 80 a barrel would put pressure on the fiscal and external positions, though the substantial buffers in place would mitigate the near-term prospect of a downgrade unless the decline in prices was much more severe. Significantly higher oil prices than forecast could put upward pressure on the ratings, if accompanied by further progress in structural reform.
• Saudi Arabia is in a volatile region and the rating factors in existing tensions and conflicts which are assumed to continue but not materially worsen.
• Fitch assumes that the challenges to the private sector from on-going labor market reforms will be manageable. A dramatic weakening of the private sector, with potential consequences for the banking sector would hit the ratings, as would backtracking on reform in the face of elevated private sector pressure. Serious and comprehensive measures to tackle underemployment in the public sector would be positive for the ratings.
