Fitch Affirms Saudi Arabia Ratings at ‘AA’; Outlook Stable

Fitch Ratings has affirmed on Friday Saudi Arabia’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘AA’. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling has been affirmed at ‘AA+’ and the Short-term foreign currency IDR at ‘F1+’.

According to the ratings agency, the affirmation reflects the following factors:

Saudi Arabia has exceptionally strong sovereign and external balance sheets. The domestic net creditor position is the second-strongest of all Fitch-rated sovereigns. Government deposits in the banking sector were 58% of GDP at end-June compared with general government debt of 0.6% of GDP at end-2013. Sovereign net foreign assets were 112% of GDP at end-2013, the fifth-strongest of all Fitch-rated sovereigns. Saudi Arabia has no sovereign external debt.

Double-digit current account surpluses have been posted in ten of the past 11 years. A surplus equivalent to 3.9% of forecast 2014 GDP was recorded in the first quarter and another double-digit outturn is expected this year. Falling oil revenues, in line with Fitch’s oil price assumptions, will lower the current account surplus each year to a forecast 6.8% of GDP in 2016. On-going surpluses will allow a further build-up of foreign assets.

Fiscal surpluses have been recorded in each year but one since 2000. A fiscal deficit was recorded in the first half of 2014 of 1.1% of forecast GDP, due primarily to unspecified foreign assistance and higher capital spending. Fitch forecasts a general government surplus of 3.1% of GDP for 2014 due to high oil revenues. Although the net creditor position is forecast to ease through to 2016 as deposits allocated for specific capital projects are drawn down, it will remain a clear credit strength.

Real GDP growth is in excess of peers. Growth was 4.7% in the first quarter, driven by higher oil production. Non-oil private sector growth eased to 4.4%, with sectors affected by the short-term impact of labour market reforms all posting notably slower growth. Non-oil private sector growth averaged 6.5% in the past five years and is forecast at around 5% through to 2016 due to substantial government spending, completion of major projects, and higher employment of nationals. Growth volatility is below peers.

Progress continues in addressing unemployment and a shortage of affordable housing, both of which Fitch considers as potential economic sources of social instability. Measures have been introduced to enhance access to residential real estate and Saudi employment in the private sector has risen.

The economy is heavily dependent on oil, which accounts for 90% of fiscal revenues and 80% of current account revenues, levels that have been 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 a Fitch forecast USD96/b (Brent) in 2014. Oil reserves are large and the Kingdom maintains substantial spare capacity that it uses to smooth disruption to production elsewhere.

The banking sector is a rating strength and soundness indicators have improved. Non-performing loans fell to 1.3% of total loans at end-June 2014 (1.4% at end-2013) and coverage rose to 166% (from 155% at end-2013). Capital adequacy is high, at 18%, and the system is well regulated. Saudi Arabia is ranked ‘a’ on Fitch’s banking system risk indicator (BSI), the strongest of all Gulf Cooperation Council members, in line with a number of mature advanced economies and below only ‘AAA’-rated Australia, Canada and Singapore, according to Fitch.

Structural indicators are generally weaker than peers, despite recent significant improvements in some areas. GDP per capita and World Bank governance indicators are well below peer medians. Saudi Arabia recorded the largest gain of all rated sovereigns in the 2013 UN Human Development Index and GNI per capita at purchasing power parity (PPP) more than doubled after a revision of the IMF’s PPP weights (which are used by Fitch). According to the World Bank measure, voice and accountability in Saudi Arabia 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 a key policy anchor, even though it constrains policy flexibility. Transparency on fiscal policy and outturns is a weakness relative to developed country peers and over-spending is common.