Outlook on Saudi Arabia’s ratings remains stable

The outlook on Saudi Arabia’s ‘AA-’ sovereign rating remains stable, according to Capital Intelligence, supported by the large net asset position of the government, a strong external balance sheet, and a sound banking system.
The government has used accumulated budget surpluses to reduce debt to relatively low levels and build up financial assets, resulting in a strong balance sheet that can act as a buffer against oil-price driven reductions in cash-flows and provides ample room to manoeuvre in the event of other economic or financial shocks.
Capital Intelligence estimates that the general government’s net asset position, which includes the external assets of the state pension funds but excludes substantial local equity holdings, was around 90% of GDP at end-2008. On the liability side, central government debt (all of which is domestic in terms of issuance and part of which is held by other public sector institutions) is comparatively low at a provisionally estimated 13.5% of GDP at end-2008.
Fiscal pressures have increased in 2009 but are manageable. The 2009 budget foresees a 50% fall in total revenue compared to 2008 and is based on an average oil price equivalent to current market levels (around USD40 a barrel). To partly offset the impact on the fiscal position, the government intends to reduce overall public expenditure from the record high level reached in 2008 but to increase outlays on social and physical infrastructure to support economic growth.
The budget plans (which do not take into account the operating surpluses of the state pension funds) imply an overall deficit of 5.6% of GDP, but the eventual outturn could be somewhat higher as actual spending tends to exceed the targeted level. Financing risks are negligible given the size of the government’s asset buffer and good appetite for government securities from local banks and pension funds, and the general government is expected to remain a relatively large net creditor.
Saudi Arabia’s balance of payments position is also expected to shift into deficit this year, putting downward pressure on central bank reserves. Nevertheless, with official foreign assets in excess of 80% of GDP at end-2008 against a projected current account deficit of 7% of GDP and gross external debt of 17% of GDP, Saudi Arabia’s capacity to absorb external shocks is high.
Dramatically lower oil prices and a decrease in oil production in line with OPEC commitments will result in a large decrease in nominal GDP in 2009 and contribute to a moderate contraction in real output growth of 1.6%, according to Capital Intelligence’s estimates. We currently expect oil prices to partially recover in 2010-2011 (to USD65-70 a barrel), returning the budget and current account to surplus, and consider Saudi Arabia’s medium-term growth prospects to be favourable given substantial investment in industrial capacity and infrastructure (although the global economic crisis is likely to result in the delay or cancellation of some projects) and ongoing efforts to diversify production and expand the role of the private sector.
The risks to sovereign creditworthiness from the banking system remain fairly low.
The sector is strongly capitalised and well-regulated, and at 42% of GDP at end-2008 commercial bank credit to the private sector is not high. Banks’ reliance on external funding is limited at about 9% of total assets, and the net foreign asset position of the sector is positive. The authorities have taken steps to ensure adequate levels of liquidity in the system, but credit growth is likely to ease in the months ahead. Capital Intelligence believes there is likely to be some weakening in asset quality as the domestic economy slows and this could give rise to additional provisions and put pressure on profitability. Nevertheless, the banking sector as a whole appears to be capable of withstanding a moderate deterioration in the operating environment.