(MENAFNEditorial) 24th June 2016
Saudi Arabia's Sovereign Ratings and 'Negative' Outlook Affirmed
RATING ACTION
Capital Intelligence Ratings (CI Ratings), the international credit rating agency, today announced that it has affirmed Saudi Arabia's Long-Term Foreign and Local Currency Ratings of 'AA-' and its Short-Term Foreign and Local Currency Ratings of 'A1+'. At the same time, CI Ratings has affirmed the Outlook for the ratings as 'Negative'.
RATING RATIONALE
The 'Negative' Outlook continues to reflect the ongoing weakness in the Kingdom's public finances, as well as CI Ratings' expectation that the drawdown of external assets under the management of the Saudi Arabian Monetary Agency (SAMA) is likely to persist.
The public finances witnessed a sharp deterioration in 2015, with revenues reaching their lowest level since 2009 due to low oil prices. Although the government tried to partially offset the impact of declining oil revenues by rationalising current and capital spending, the central government budget position posted a large deficit of 15.4% of GDP (compared to a deficit of 2.3% in 2014). Assuming an average oil price of USD60 per barrel in 2016-17 and the implementation of further fiscal consolidation measures, the budget deficit is expected to average at 12.4% of GDP this year and next.
Government debt – all of which is domestic – also increased, albeit from a low base, reaching 5.8% of GDP in 2015 compared to 1.6% in 2014. Government debt is expected to increase to around 25% of GDP in 2017, driven by fiscal financing needs.
In response to the deterioration of public finances and the continued decline in foreign assets (to USD580 billion in March 2016, compared to USD617 billion in 2014), the Saudi government announced a comprehensive regulatory, economic and fiscal national transformation plan, Saudi Vision 2030. The plan serves as a blueprint for the post hydrocarbon era and aims at reducing the economy's reliance on hydrocarbon through initiating a public investment fund that would invest in different economic sectors. The size of the fund is expected to reach USD2 trillion by 2030, and is also expected to broaden the government's revenue base. While the proposed reforms should help to reduce economic concentration, implementation risks remain considerable in view of current global economic conditions and the ambitious short-to-medium term targets set in the plan.
Despite the structural fiscal shortcomings – in particular the over-reliance on hydrocarbon revenues and the narrow tax base – the government's balance sheet remains relatively sound, characterised by sizeable financial assets and minimal debt. Notwithstanding the magnitude of the budget deficit, refinancing risks currently appear to be low owing to the likely appetite for government securities from local banks and pension funds, as well as the large fiscal buffer in the form of deposits held with SAMA – currently equivalent to more than 50% of GDP.
Balance of payments performance has also weakened, with the external current account posting a deficit of about 8% of GDP in 2015, compared to a surplus of around 10% in 2014 and is expected to remain in deficit in 2016-17. Nevertheless, Saudi Arabia remains a large net external creditor, with official foreign assets alone covering the stock of gross external debt (public and private) more than five-fold.
Saudi Arabia's credit ratings continue to be supported by the sheer size of its hydrocarbon reserves as well as by the net creditor position of the government and country as a whole.
 
CI Ratings expects real output to grow moderately by 1.2% in 2016 and 1.9% in 2017, compared to 3.4% in 2015, reflecting the impact of low oil prices and stagnating government expenditure on key sectors of the economy. The banking system remains sound, and currently poses low risks to the sovereign.
The sovereign's ratings remain constrained by structural fiscal shortcomings âˆ' including overreliance on oil revenues, a limited tax base and rigid expenditures, as well as institutional weaknesses, socioeconomic challenges and limited fiscal transparency.
In CI Ratings' opinion, government operations and policymaking structures lack adequate transparency and accountability, particularly in comparison with more advanced economies; the quality of governance indicators is also generally weaker. On the external front, Saudi Arabia is exposed to the same geopolitical event risk that affects the ratings of all Gulf sovereigns âˆ' including potential threats to trade, infrastructure and security from a military conflict in the Middle East region.
RATING OUTLOOK
The Outlook for the ratings is 'Negative'. This indicates that Saudi Arabia's ratings are likely to be downgraded over the next 12 months reflecting the impact of lower oil prices on both the public and external finances, and consequently on the country's capacity to absorb economic shocks.
CONTACT
Primary Analyst
Dina Ennab
Sovereign Analyst
Tel: +357 2534 2300
E-mail: dina.ennab@ciratings.com
Rating Committee Chairman
Morris Helal
Senior Credit Analyst
The ratings have been initiated by Capital Intelligence. The rated entity did not participate in the rating process. The information source used to prepare the credit ratings is public information. Capital Intelligence had access to the published fiscal and external accounts, but not to any other internal documents of the issuer for the purpose of the rating. However, CI considers the quality of information available on the issuer to be satisfactory for the purposes of assigning and maintaining credit ratings. Capital Intelligence does not audit or independently verify information received during the rating process.
The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the issuer were first released in December 1996. The ratings were last updated in December 2015.
The principal methodology used in determining the ratings is Sovereign Rating Methodology. The methodology, the meaning of each rating category, the time horizon of rating outlooks and the definition of default, as well as information on the attributes and limitations of CI's ratings, can be found at www.ciratings.com. Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at http://cerep.esma.europa.eu.
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.