Link to Fitch Ratings’ Report: Saudi Arabia – Rating Action
ReportLONDON, March 07 (Fitch) Fitch Ratings has upgraded Saudi
Arabia’s Long-term
foreign and local currency Issuer Default Ratings (IDR) to ‘AA’
from ‘AA-’. The
Outlooks are Stable. The Country Ceiling has been upgraded to
‘AA+’ from ‘AA’
and the Short-term foreign currency IDR has been affirmed at
‘F1+’.
KEY RATING DRIVERS
The upgrade of Saudi Arabia’s IDRs reflects the following key
rating drivers and
their relative weights:
Medium
The strong sovereign and external balance sheets have been
bolstered. The net
creditor position is the strongest of all Fitch-rated sovereigns
bar Macao, with
government deposits in the banking sector rising to 58.7% of GDP
at end-2013
compared with general government debt of just 0.6% of GDP. Net
external assets
climbed to over 100% of GDP at end-2013, well in excess of the
peer median and
the position of Kuwait and Abu Dhabi (both AA/Stable). Saudi
Arabia does not
have sovereign external debt. Although narrowing, forecast
fiscal and external
surpluses will support these substantial buffers.
The authorities have continued to take steps to address
unemployment and a
shortage of affordable housing, both of which Fitch considers
potential economic
sources of social instability.
Labour market reform has continued, with a normalisation of the
status of
expatriate workers (achieved through a change in the work visas
of around four
million expatriates to correct their employment status and the
repatriation of
around one million illegal workers) and efforts to increase the
participation of
nationals in the labour force. Saudi employment in the private
sector increased
significantly in 2013. However, at 11.5%, unemployment of
nationals is still
some way above the peer median and Fitch assumes that
underemployment in the
public sector is high.
Work to increase the supply of public sector housing continues
and greater
private sector provision of housing has moderated rental
inflation. A package of
mortgage laws has been approved. Although government
interventions in the labour
and housing markets have been costly, they have been taken from
a position of
budgetary strength and have generally caused little undue
disruption to the
private sector.
Banking soundness indicators have improved. Non-performing loans
had fallen to
1.4% at end-2013 and coverage had risen to 155%. Capital
adequacy is high, at
17.9%, and the system is well regulated. Saudi Arabia is ranked
‘a’ on Fitch’s
banking system risk indicator (BSI), the strongest of all GCC
members and below
only ‘AAA’ rated Australia, Canada and Singapore.
Domestic oil consumption has declined, easing pressure on the
fiscal breakeven
oil price. Although the decline stems primarily from greater
availability of
gas, rather than a fall in overall energy consumption, the
opportunity cost of
using oil instead of gas domestically is substantial given the
differential
between global and local oil prices and the lack of gas export
infrastructure.
New energy efficiency measures have been introduced and public
awareness of the
distortions caused by low energy prices is rising. However, no
change in pricing
is expected over the forecast period.
Spending trends over 2013, including a likely peak in capital
expenditure and
the first reduction in the government wage bill since 2001,
combined with a
relatively conservative projection for spending growth in the
2014 budget also
point to a moderation in the growth in the breakeven oil price
in the next few
years.
Saudi Arabia’s ‘AA’ IDRs also reflect the following key rating
drivers:-
Real GDP growth is in excess of peers and non-oil growth is
faster still. Growth
slowed to 3.8% in 2013 owing to lower oil production. Non-oil
growth was robust,
at 5%, and has outpaced growth in the oil sector for seven of
the past eight
years. The volatility of growth is below peers. Substantial
government spending,
completion of major projects, and higher employment of nationals
should keep
non-oil growth around 5% over the forecast period.
The economy is heavily dependent on oil, which accounts for 90%
of fiscal
revenues and 80% of current account revenues, levels that are
little changed
over the past decade. However, large and growing buffers mean it
would take a
prolonged period of much lower oil prices to materially
undermine the fiscal and
external positions, though the fiscal breakeven oil price
continues to rise, to
an estimated USD84/b (Brent) in 2013. Oil reserves are large and
the Kingdom
maintains substantial spare capacity that it uses to smooth
disruption to
production elsewhere. Large new non-associated gasfields will
come on stream in
2014.
Structural indicators are generally weaker than peers. GDP per
capita, Human
Development indicators and World Bank governance indicators are
all well below
peer medians. According to the World Bank measure, voice and
accountability is
the lowest of all rated sovereigns. Fitch considers exposure to
geopolitical
risk to be higher than peers given the Kingdom’s prominent role
in a volatile
region.
Fitch considers the exchange rate peg to the US dollar to be a
key policy
anchor, even though it constrains policy flexibility.
Transparency on fiscal
policy and outturns is a weakness relative to peers and
overspending is common.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch’s assessment that upside and
downside risks to
the rating are currently well balanced. Consequently, Fitch’s
sensitivity
analysis does not currently anticipate developments with a high
likelihood of
leading to a rating change.
The main factors that, individually or collectively, could lead
to positive
rating action are:
- Progress in tackling weaknesses in structural indicators and
the economic
policy framework, relative to peers, and enhancing the business
environment in
ways conducive to further diversification of the economy and the
revenue base.
The main factors that, individually or collectively, could lead
to negative
rating action are:
- A material erosion of fiscal and external buffers, likely
stemming from a
prolonged period of sharply lower oil prices or rapid growth in
the fiscal
breakeven oil price.
- Spill over from regional conflicts or a domestic political
shock that
threatens stability or affects key economic activities.
KEY ASSUMPTIONS
The ratings and Outlooks are sensitive to a number of
assumptions.
Fitch forecasts Brent crude to average USD100/b in 2014 and
2015.
Fitch assumes that Saudi Arabia will not be materially affected
by any of the
conflicts in the region and that the domestic political scene
will remain
stable.
Fitch assumes the government will remain committed to labour
market reforms and
that the reforms will not cause significant disruption to the
economy. The
authorities will remain attentive to other potential sources of
social unrest.
Contact:
Primary Analyst
Paul Gamble
Director
+44 20 3530 1623
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Secondary Analyst
Maria Malas-Mroueh
Director
+44 20 3530 1081
Committee Chairperson
James McCormack
Managing Director
+44 20 3530 1286
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530
1103, Email:
peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel:
+44 20 3530
1153, Email: hannah.huntly@fitchratings.com.
Additional information is available on www.fitchratings.com
Applicable criteria, ‘Sovereign Rating Criteria’ dated 13 August
2012 and
‘Country Ceilings’ dated 09 August 2013, are available at
www.fitchratings.com.
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Fitch Upgrades Saudi Arabia to "AA"; Outlook Stable
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