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S&P affirms Saudi Arabia's credit rating on growth prospects, spending boost

Saudi Arabia, April 8, 2018

S&P Global Ratings affirmed Saudi Arabia's credit rating with a stable outlook on the expectation that economic growth will accelerate in 2018 as the world's biggest oil exporter continues to boost spending.

“The stable outlook is based on our expectation that economic growth will accelerate moderately in 2018, supported by rising government investment,” Benjamin Young and Trevor Cullinan, Dubai-based analysts at S&P Global Ratings, said in a report.

Saudi Arabia’s economy is expected to grow 2 per cent this year after contracting 0.7 per cent last year.

The A-/A-2 foreign and local currency credit ratings puts Saudi Arabia firmly in the investment grade category, suggesting that it’s unlikely the government would default on its financial obligations. The ratings are particularly watched by bond holders as a way to measure the risk on credit sold by the government and corporations.

While Saudi Arabia hasn’t been traditionally active in the international bond market as a seller, in recent years it has stepped up sales of conventional and sharia-compliant bonds to help plug a budget deficit caused by the three-year slump in oil prices that began in 2014.

The Saudi Arabian government sold US$17.5 billion in bonds in its first international sale in 2016. The kingdom plans to borrow about $31bn this year to bridge an expected budget deficit of $52bn and fund its growth plans, according to Bloomberg News. It raised about $36bn in 2017, $14bn of which was from domestic bonds and $22bn from international debt capital markets.

Cuts in some of the state subsidies and levying of 5 per cent VAT in January to generate much needed non-oil revenues are some of the other measures Riyadh has taken to bring stability to state finances,

“Saudi Arabia has articulated an ambitious strategy to reduce the economy’s dependence on oil and imported labour to transform the domestic education and job market and to consolidate the budget,” the S&P report said.

“Saudi Arabia will partly fund its ambitious economic reform programme using the large fiscal and external buffers that it amassed during the pre-2015 era of twin balance of payment and budgetary surpluses.”

S&P said that its forecast of oil prices stabilising at an average of $60 per barrel from 2018 to 2021 would help the government keep its finances in order. The kingdom, Opec's biggest oil producer, is expected to produce 10 million barrels a day in 2018, in line with Opec’s 2016 decision to reduce supply. Next year, it’s expected that there will only be a gradual increase in production, S&P noted.

With stability in finances, the annual increase in government debt is expected to stay steady at 3 per cent from 2018 to 2021. Although, the budget deficit remains large, the government has strong external and fiscal stock positions. The country’s liquid assets as a ratio of GDP stand at 94.3 per cent while debt to GDP is 21.2 per cent, according to S&P.

Risks that might prompt a downgrade in the kingdom's ratings include a deterioration in the country’s fiscal position or an escalation in regional geopolitical tensions.

“We could lower our ratings if we observed a reversal in the trend of fiscal consolidation, or a sharp deterioration of the sovereign’s external position,” the analysts said. “An unexpected materialisation of contingent liabilities or a build-up of arrears could also place additional pressure on expenditures.

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