CI affirms Saudi Arabia sovereign ratings, stable outlook on prudent policy

Capital Intelligence (CI) affirmed on Sunday the “AA-“ ratings of Saudi Arabia’s long-term foreign and local currency with a stable outlook on prudent management of the kingdom’s oil wealth during the last four years of high oil prices.

The international rating agency also kept the the “A1+” ratings of the kingdom’s short-term foreign and local currency, but warned from fiscal pressure due to lower international crude oil prices, regional conflict, and high public spending, which is expected to result in a budget deficit of 14.2 percent of GDP in 2015.

‘’There is anecdotal evidence that the government has delayed paying some contractors,’’ CI said.

During the years of record oil prices, the kingdom, the world’s top oil exporter, has accumulated deposits held with the Saudi Monetary Agency (SAMA), the central bank.

The government posted record budgets in the past few years, pledging to spend over $130 billion on public health, infrastructure, and education projects. Saudi Arabia has also widened its social safety net and increased unemployment benefits. 

“The sovereign’s ratings remain constrained by structural fiscal shortcomings – in particular the over reliance on oil and the narrow non-oil tax base, as well as institutional weaknesses, socioeconomic challenges and limited fiscal transparency,” it said.

Oil income accounts for 90 percent of total government revenues, posing a challenge as oil prices may continue to decline.

Meanwhile, creating jobs for the young, growing population—which increases by about one million every two years— is proving to be challenging as the unemployment rate hovered around 12 percent last year, despite an aggressive government drive to employ Saudi nationals in the private sector.

The budget deficit, however, is projected to narrow to 8.1 percent in 2016, based on oil prices of $60 per barrel, CI said.

Foreign assets under SAMA’s management reached $732 billion by the end of 2014, or 97 percent of estimated GDP in 2014, according to official figures. They are almost ten times as large as the kingdom’s gross external debt stock.

“Near-term financial risks remain low given the likely appetite for government securities from local banks and pension funds,” CI added.

But armed conflicts in the Middle East and geopolitical challenges pose a threat to the flow of trade, infrastructure and security in the region, which could have a negative impact on the stable outlook.

“Saudi Arabia’s ratings are likely to remain unchanged over the next 12 months in view of low debt levels and high international liquidity,’’ CI projected. “However, the sovereign’s shock absorption capacity could weaken in the case of prolonged period of low oil prices.”