Saudi Arabia 'A-/A-2' Ratings Affirmed; Outlook Stable

  • At the March 6 OPEC meeting, Saudi Arabia and Russia and other OPEC members did not reach agreement on continued oil supply restrictions, leading to the collapse of the OPEC+ supply constraint agreement from April 1, 2020.
  • The prospect of a large supply increase, alongside lackluster demand tied to the COVID-19 pandemic, led to a sharp fall in global oil prices, which will see a sharp rise in Saudi Arabia's fiscal deficit in 2020, albeit narrowing thereafter.
  • Our estimate of Saudi Arabia's strong net asset (stock) position on both its fiscal and external balances continues to be a key ratings support, but prolonged low oil prices will erode its net asset stock and begin to put pressure on the ratings.
  • We are affirming our 'A-/A-2' long- and short-term sovereign credit ratings on Saudi Arabia, with a stable outlook.

Rating Action

On March 26, 2020, S&P Global Ratings affirmed its 'A-/A-2' unsolicited long- and short-term foreign and local currency sovereign credit ratings on Saudi Arabia. The outlook is stable.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Saudi Arabia are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2020 EMEA Sovereign, Regional, And Local Government Rating Publication Dates," published Dec. 20, 2019, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation are material and sudden changes in credit conditions--a sharp drop in oil prices and downward revisions to S&P Global Ratings' hydrocarbon price assumptions for 2020 and beyond. The next scheduled review date for Saudi Arabia is March 27, 2020.

Outlook

The stable outlook reflects our expectation that the current low oil price environment, although affecting fiscal flows, will be counterbalanced by Saudi Arabia's strong government and external balance sheets, with net asset-stock positions on both.
We could lower our ratings if we observed fiscal weakening beyond our expectations, or a sharp deterioration in the sovereign's external position. A sustained rise in geopolitical or domestic political instability, that posed a significant and continued threat to the oil sector, could also put downward pressure on the ratings.
We could raise the ratings if Saudi Arabia's economic growth prospects improve beyond our current expectations, for example, as a result of a sustained and significant pick-up in oil prices and volume demand, possibly tied to the end of the COVID-19 pandemic, a significant easing of U.S.-China trade tensions, and a rebound of the global economy. We could also raise the ratings should the authorities improve the transparency of accounting for general government assets.

Rationale

On March 19, 2020, S&P Global Ratings materially lowered its oil price assumption for 2020. This follows an earlier significant downward revision of its price assumptions on March 9, 2020. Prices for crude oil in spot and futures markets are more than 55% lower than levels observed during the summer of 2019 when prices increased due to rising geopolitical tensions. When we last reviewed Saudi Arabia ("Saudi Arabia 'A-/A-2' Ratings Affirmed; Outlook Stable," published Sept. 27, 2019, on RatingsDirect), we expected Brent oil prices to average $60 per barrel (/bbl) in 2020 and to gradually decline to $55/bbl from 2021. We now assume an average Brent oil price of $30/bbl in 2020, $50/bbl in 2021, and $55/bbl from 2022 (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020).
Oil prices plummeted following OPEC+'s failure to agree on further production cuts during meetings on March 6. OPEC+ did not agree to a proposed further reduction of 1.5 million barrels per day (mmbbl/d) to address an expected significant drop in global demand partly due to the spread of the coronavirus. The proposed reduction was in addition to the current 2.1 mmbbl/d production decrease set to expire at the end of March. Shortly after the meetings, Saudi Arabia announced that it was immediately slashing its official selling price and would increase its production to over 12 mmbbl/d in April after the current production cut expires. These actions possibly signal that, despite a collapse in global demand and shrinking physical markets, Russia and Saudi Arabia may engage in a price war to try and maintain market share and market relevance. Oil markets are now heading into a period of a severe supply-demand imbalance in second-quarter 2020. In line with our economic outlook (see "Economic Research: COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," published March 17, 2020), we anticipate a recovery in both GDP and oil demand through the second half of 2020 and into 2021 as the most severe impacts from the coronavirus outbreak moderate.
Saudi Arabia is the only country in the world that maintains large excess oil export capacity, and is therefore able to very significantly ramp up (or down) production (by around 2 mmbbl/d within days. The ramp-up in production and cuts to prices could constitute a sustained push for market share. However, they may also end up being a temporary attempt to demonstrate market pricing power--and thereby force Russia and others back to the cartel negotiating table, while simultaneously putting pressure on other higher cost producers such as U.S. shale companies. As chair and host of the G-20 meetings this year, Saudi Arabia may also eventually choose to help contribute to stabilizing global markets in the face of the coronavirus pandemic.
The sharp fall in oil prices (albeit partially counterbalanced by increased Saudi production volumes) will lead to a significant rise in Saudi fiscal deficits in 2020 and beyond. We have revised our forecast for the 2020 general government fiscal deficit up to 11.2% of GDP, from 3.9%, and average deficits from 2020-2023 to 6.4%, from 4.1%, since our last review. Given the sharp fall in oil prices, fiscal revenues will be affected, although this will be partially compensated by expenditure cuts and dividend transfers from large state-owned enterprises including Saudi Aramco; and will also lead to increased issuance and higher drawdowns from sovereign assets. In late March the government unveiled a $32 billion emergency support package for businesses, as well as plans to cut non-essential expenditure and raise the debt ceiling to 50% of GDP from 30%.
Nevertheless, our estimate of Saudi Arabia's strong net asset (stock) position on both its fiscal and external balances continues to be a key ratings support. Despite the sharp increase in fiscal deficits, the general government will remain in a net asset stock position of 65% of GDP in 2020-2023, albeit falling from 80% of GDP in 2020 to 54% in 2023.
Prolonged low oil prices without a significant fiscal adjustment could lead to an erosion of the net asset stock position and put pressure on the ratings.
Institutional and Economic Profile: The Salman branch of the Al Saud family consolidates power, while the low oil price environment continues to put pressure on the Saudi economy
  • The Crown Prince continues to consolidate his position as heir to the throne.
  • The Saudi government has articulated an ambitious strategy to reduce the economy's dependency on oil and imported labor, and to transform the domestic education and job market, with variable results.
  • Policy decision-making is centralized, with limited institutional checks and balances.
Given its monarchic framework, decision-making on future policy reform is likely to remain centralized. The Crown Prince has continued to consolidate his position as heir to the throne, having superseded former senior members of the royal family. We expect that the key parameters of Saudi Arabia's centralized institutional framework will remain broadly unchanged through 2023.
We forecast real GDP to rise by about 4.0% this year, up from just 0.3% in 2019, driven mainly by a sharp rise in oil production tied to the collapse of the OPEC+ deal. We expect real GDP growth to moderate thereafter and average 2.5% over 2020-2023. Nevertheless, nominal GDP growth will be affected by the sharp fall in prices: we forecast 2020 nominal GDP to shrink by 14.2% and then average +1.1% in 2020-2023. Our GDP per capita estimate is about $20,500 in 2020, and we expect that, on a per capita trend basis, this will grow by a yearly average of 1.5%.
We do not expect any major deviation from the recent domestic policy course of planned economic diversification, "Saudi-ization" (replacing expatriates with Saudis) of the workforce, and gradual socioeconomic liberalization, especially with regard to attempting to increase female participation in the workforce. The government is implementing a series of reforms that include social measures aimed at increasing labor participation (particularly of women), improving levels of educational attainment, and raising the private sector's role in the economy. However, the non-oil economy will be affected by the coronavirus pandemic; in late February the authorities stopped visitors from undertaking the Umrah pilgrimage and subsequently stopped all flights for two weeks, closed malls, and curtailed bus, taxi travel, and the population's freedom of movement in an effort to stop the spread of the disease.
The government will continue to try to rebalance the economy and its public finances away from a reliance on crude production, while attempting to reduce its reliance on expatriate labor, with partial success. The purchase of SABIC by Saudi Aramco, as well as a sizable investment in India's Reliance Group, represent a continued push by Saudi Aramco and the country to try and move further into midstream oil businesses, such as refining and petrochemicals, as part of diversifying away from upstream crude production. Nevertheless, given that the oil industry makes up a significant portion of Saudi Arabia's GDP, our growth forecast continues to be highly sensitive to assumptions on production targets and prices.
We anticipate that public investment will remain high under ongoing expenditure plans tied to Vision 2030, the goals of which are to support the non-oil economy and private-sector demand. The country will partly fund its ambitious economic reform program using the large fiscal and external buffers that it amassed during the pre-2015 era of twin balance of payments and budgetary surpluses, as well as through privatizations, including the November 2019 IPO of 1.7% of Saudi Aramco shares which delivered about $27 billion (Saudi riyal 100 billion) to government coffers, and the sale of 70% of SABIC for $69 billion.
Ongoing geopolitical tensions with Iran and Yemenese Houthi militia will constrain the ratings, although we expect Iran and Saudi Arabia to shy away from a fully-fledged direct military confrontation. The U.S. will remain the guarantor of Saudi Arabian security vis-à-vis Iran.
Flexibility and Performance Profile: Strong external and fiscal positions from a stock perspective, despite ongoing fiscal pressures
  • We expect wide fiscal deficits over the next three years, due to our lower oil price assumptions and sizable fiscal expenditure, despite an increase to oil production and improved non-oil revenue collection.
  • Our estimate of the kingdom's strong net asset (stock) position on both its fiscal and external balances is a key support for the rating.
  • While we forecast a high level of foreign currency reserves, a continued increase in external debt issuances could, over time, moderate Saudi Arabia's strong external stock position.
Revised lower oil price assumptions, as well as the government's ongoing somewhat expansionary fiscal stance, will weigh on previous plans to consolidate the fiscal deficit. Due to the breakdown of the OPEC+ deal, we forecast that Saudi production will rise to over 11 mmbbl/d on average over 2020, and this will partially compensate the sharp fall in the oil price. In comparison, Saudi Arabia produced about 10.3 mmbbl/d in 2018 at a Brent price of about $66 per barrel and 9.8 mmbbl/d in 2019 at a price of $64.
The central government deficit is financed both by asset drawdowns from its significant stock of assets, and partially by debt issuance. We forecast that Saudi Arabia will report gross debt of about 41% of GDP by 2023, up from 20% in 2019 and almost zero in 2014. Our general government balance consolidates the central government and the social security system, and it also includes the share of drawdowns of investment income from government assets.
Although Saudi Arabia has been running budget deficits on a flow basis in recent years, it has remained strong on a stock basis, owing to strong accumulation in past years when oil prices were high. We expect net general government assets (the excess of liquid fiscal financial assets over government debt) will average about 65% of GDP between 2020 and 2023. These fiscal assets include the central government's deposits at the Saudi Arabian Monetary Authority (SAMA), key government institutions' deposits, and an estimate of investment income. We also include in our calculation an estimate of government pension funds' liquid assets, including part of the Public Investment Fund (PIF). PIF has grown rapidly in size and importance over recent years, with the full support of the monarchy, and has received the majority of funds from the sales of Aramco and Sabic shares.
In addition to the budget, the government has plans for domestic capital expenditure led by the PIF, the National Development Fund, and other investment funds. If productively deployed, this could help maintain growth potential through our ratings horizon.
The sharp fall in the oil price has affected Saudi Arabia's traditionally strong external position. We estimate that the current account will fall into deficit of 6.5% of GDP in 2020 and will average -0.1% of GDP between 2020 and 2023 (down from our forecast in our previous review of a surplus of 4.7% in 2020 and 3.8% in 2020-2022). We expect that Saudi Arabia's liquid external assets, net of external debt, will average about 131% of current account payments over 2020-2023. Gross external financing needs will likely remain at just below 50% of the sum of usable reserves and current account receipts over the same period, suggesting ample external liquidity. We think usable reserves will remain high over the forecast period, covering about 16 months of current account payments. In our calculation of usable reserves, we subtract the monetary base from gross foreign currency reserves for sovereigns that have a long-standing fixed peg with another currency (because the reserve coverage of the base is critical to maintaining confidence in the exchange-rate link).
Monetary policy is both stabilized, and constrained, by the fixed exchange rate: it helps to anchor the population's inflation expectations, but largely requires Saudi Arabia to follow movements in the U.S. federal funds rate (even when they may not be entirely appropriate for Saudi Arabian economic conditions). Recent cuts to the base rate should help support the non-oil economy. We expect that the peg will be maintained throughout the forecast period, despite oil price pressures.

Key Statistics

Table 1

Saudi Arabia Selected Indicators
SAR Mil.2014201520162017201820192020202120222023
Economic indicators (%)
Nominal GDP (bil. LC)2,8362,4542,4192,5822,9492,9742,5362,7902,9833,052
Nominal GDP (bil. $)756654645689787793676744795814
GDP per capita (000s $)24.620.820.321.524.324.220.422.323.623.9
Real GDP growth3.74.11.7(0.7)2.40.34.01.62.71.8
Real GDP per capita growth1.01.61.0(1.8)1.4(0.7)3.00.61.70.8
Real investment growth7.53.7(14.0)0.7(2.1)4.01.01.71.51.5
Investment/GDP28.835.130.928.924.227.830.725.622.920.9
Savings/GDP38.526.527.230.433.233.024.225.925.524.1
Exports/GDP46.933.331.134.939.935.527.832.332.832.9
Real exports growth(1.9)0.78.0(3.1)6.8(5.7)8.02.12.62.6
Unemployment rate5.75.65.66.06.05.56.06.06.06.0
External indicators (%)
Current account balance/GDP9.8(8.7)(3.7)1.59.05.2(6.5)0.42.63.2
Current account balance/CARs19.3(23.3)(10.6)4.021.213.6(20.7)1.17.28.9
CARs/GDP50.537.234.937.642.438.231.335.536.036.2
Trade balance/GDP24.36.88.614.321.517.77.913.615.115.5
Net FDI/GDP0.30.4(0.2)(0.9)(2.4)(1.4)(1.1)(1.0)(1.0)(1.0)
Net portfolio equity inflow/GDP(2.3)(1.1)(1.8)(2.6)(2.9)(2.5)(2.0)(1.6)(1.6)(1.6)
Gross external financing needs/CARs plus usable reserves30.634.634.337.438.341.347.649.350.150.0
Narrow net external debt/CARs(225.3)(309.4)(268.0)(204.0)(140.8)(144.3)(177.0)(129.0)(115.4)(110.3)
Narrow net external debt/CAPs(279.2)(251.0)(242.3)(212.6)(178.7)(167.0)(146.6)(130.4)(124.4)(121.1)
Net external liabilities/CARs(207.2)(283.2)(265.7)(240.9)(189.6)(213.5)(271.9)(208.4)(189.0)(182.1)
Net external liabilities/CAPs(256.7)(229.7)(240.2)(251.0)(240.6)(247.0)(225.2)(210.7)(203.6)(199.8)
Short-term external debt by remaining maturity/CARs2.64.65.67.27.211.219.715.415.616.4
Usable reserves/CAPs (months)25.626.225.922.019.019.019.416.015.115.2
Usable reserves (mil. $)656,907536,232455,156415,910413,492412,997349,012333,291338,710349,305
Fiscal indicators (general government; %)
Balance/GDP2.1(7.6)(15.9)(6.6)(3.5)(1.7)(11.2)(5.6)(4.0)(4.6)
Change in net debt/GDP(2.9)17.717.67.05.9(2.0)9.54.64.44.4
Primary balance/GDP2.1(7.6)(15.7)(6.3)(3.0)(1.0)(10.2)(4.3)(2.5)(2.9)
Revenue/GDP44.736.226.433.036.633.534.636.637.136.3
Expenditures/GDP42.643.842.339.640.235.245.842.241.140.9
Interest/revenues0.00.00.81.11.52.13.03.74.04.6
Debt/GDP0.11.89.814.416.320.233.836.139.240.6
Debt/revenues0.25.037.043.644.660.197.898.7105.6111.7
Net debt/GDP(120.6)(121.8)(105.9)(92.2)(74.8)(76.2)(79.8)(67.9)(59.1)(53.4)
Liquid assets/GDP120.7123.6115.6106.591.296.4113.7104.098.394.0
Monetary indicators (%)
CPI growth2.21.32.0(0.9)2.5(1.2)1.92.02.12.1
GDP deflator growth(2.3)(16.9)(3.0)7.611.50.5(18.0)8.34.10.5
Exchange rate, year-end (LC/$)3.753.753.753.753.753.753.753.753.753.75
Banks' claims on resident non-gov't sector growth11.88.13.5(1.0)2.77.35.24.65.05.0
Banks' claims on resident non-gov't sector/GDP46.458.060.956.550.854.166.763.462.363.9
Foreign currency share of claims by banks on residents8.611.47.77.87.67.47.27.06.86.6
Foreign currency share of residents' bank deposits10.310.27.98.89.08.68.68.68.68.6
Real effective exchange rate growth2.19.33.0(2.0)(0.8)(0.2)N/AN/AN/AN/A
Sources: General Authority for Statistics (Economic Indicators); Saudi Arabia Monetary Authority (External Indicators); Saudi Arabia Monetary Authority, Bloomberg, International Financial Statistics, Ministry of Finance (Fiscal Indicators); International Monetary Fund, Saudi Arabian Monetary Authority, Bloomberg (Monetary Indicators)
Adjustments: Usable reserves adjusted by subtracting monetary base from reported international reserves/subtracting required bank reserves on resident foreign-currency deposits from reported international reserves. General government revenues adjusted by including investment income from Sovereign Wealth Funds. Government debt adjusted by excluding guaranteed debt.
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2


Saudi Arabia Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment4Limited predictability of future policy responses because of highly centralized decision-making, and high regional security risk. The societal reform process could stoke protest from conservative sectors of society if they go too far or too fast. Additionally, high levels of Saudi youth unemployment could foment discontent within civil society and strain government policymaking if not addressed over the medium term.
Economic assessment4Based on GDP per capita ($) as per the Selected Indicators in Table 1 Weighted average real GDP per capita trend growth over a 10-year period is well below sovereigns in the same GDP per capita category.
External assessment1Based on narrow net external debt and gross external financing needs as per the Selected Indicators in Table 1.
Fiscal assessment: flexibility and performance5Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1. Based on liquid assets/GDP as per Selected Indicators in Table 1. The Sovereign has a volatile revenue base. Oil and gas revenue account for about 70% of the total revenue.
Fiscal assessment: debt burden1Based on net general government debt (% of GDP) and general government interest expenditures (% of revenues) as per Selected Indicators in Table 1.
Monetary assessment4The exchange rate regime is a conventional peg. The Saudi riyal is pegged to the U.S. dollar. Saudi Arabia's central bank operates independently but is less secure than at better assessments. Annual CPI is less than 10%
Indicative ratingbbb+As per Table 1 of "Sovereign Rating Methodology
Notches of supplemental adjustments and flexibility1We consider that Saudi's installed oil production capacity gives the government flexibility to quickly raise, or cut, oil production at short notice. In addition. In addition, the economic score is potentially in transition given reported population dynamics and the upside to GDP per capita trend growth as a result. These factors have a positive impact on creditworthiness that is not fully captured in the indicative rating.
Final rating
Foreign currencyA-
Notches of uplift0We do not believe that default risks apply differently to foreign-and local currency debt.
Local currencyA-
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