S&P Global Ratings affirmed its 'A-/A-2' unsolicited long- and short-term foreign and local currency sovereign credit ratings on Saudi Arabia; the outlook is stable.
The stable outlook is based on the agency’s expectation that economic growth will accelerate moderately in 2018, supported by rising government investment. At the same time, it is likely that the Saudi authorities will continue to take steps to consolidate public finances over the next two years, while maintaining Saudi Arabia's formidable stocks of liquid external assets.
S&P could lower its ratings if a reversal in the trend of fiscal consolidation, or a sharp deterioration of the sovereign's external position is observed. An unexpected materialiszation of contingent liabilities or a build-up of arrears could also place additional pressure on expenditures. The ratings could also come under pressure if there is a significant increase in domestic or regional political instability, which would have fiscal consequences. The ratings could be raised if Saudi Arabia's economic growth prospects improved markedly beyond our current assumptions.
The ratings on Saudi Arabia are supported by its strong external and fiscal stock positions, which it will likely maintain despite large central government deficits. The ratings are constrained by limited public-sector transparency and limited monetary policy flexibility. While decision-making structures are centralised and, in S&P’s view, relatively opaque, it is unlikely any major deviation from the stated domestic policy course of fiscal consolidation, economic diversification, and gradual socioeconomic liberalisation will occur.
It is understood that authorities are concerned by the notable decline in net direct investment inflows since 2013, and that authorities are focused on creating incentives for foreign investment in Saudi's non-commodity sector.
The key parameters of Saudi's institutional framework are expected to remain steady through the 2018-2021 forecast period. Saudi Arabia will partly fund its ambitious economic reform program using the large fiscal and external buffers that it amassed during the pre-2015 era of twin balance of payments and budgetary surpluses. The government is implementing a series of reforms that include social measures that aim to increase labour participation (particularly female), to improve educational attainment, and to raise the private sector's role in the economy, while achieving a balanced budget by 2023 (previously 2020).
While the country's decision-making process remains highly centralised, no major deviation from the goal to broaden the economy beyond its traditional reliance on hydrocarbons is expected. What S&P considers more complicated to predict is whether the government's other two objectives—to attract more foreign investment and to reduce reliance on foreign expertise including foreign labour—will succeed.
The authorities have decided to push back the target to balance the general government budget from 2020 to 2023. This reflects the decision to increase public investment under a four-year stimulus plan aimed at stabilising private-sector demand, even as the government moves on other fiscal consolidation measures, such as energy tariff hikes. Overall, it seems there are grounds to project a gradual economic recovery, following last year's contraction.
Nevertheless, given that oil production makes up a significant portion of Saudi GDP, forecasting growth in Saudi Arabia continues to be highly sensitive to assumptions of OPEC production targets, not least because Saudi Arabia maintains the world's largest installed crude oil production capacity at around 12 million barrels per day, and is the key marginal producer. S&P’s GDP per capita estimate is just shy of $22,000 in 2018, and on a trend basis, growth is expected to remain somewhat below peers'.