RAM reaffirms Saudi Arabia’s gAA3(pi) rating
KUCHING: RAM Ratings has reaffirmed Saudi Arabia’s globalscale rating of gAA3(pi)/Stable/ gP1(pi), premised on its sturdy sovereign balance sheet, underlined by substantial sovereign reserves to the tune of 119 per cent of Gross Domestic Product (GDP) as at end-2016, which has provided a sizeable buffer against credit deterioration in recent years.
“Saudi Arabia’s sovereign metrics are expected to improve further as global energy prices continue to gradually recover,” said Esther Lai, RAM’s Head of Sovereign Ratings.
The country’s economy is projected by RAM to register marginal growth of 0.8 per cent in 2018 after an estimated contraction of 0.7 per cent in 2017.
RAM saw that GDP growth will mainly be driven by the non-hydrocarbon sectors as the country’s hydrocarbon production is expected to remain unchanged in 2018, given the output curtailment arrangement reached by the Organisation of Petroleum Exporting Countries ( OPEC) and major non-OPEC producers, which has been extended until the end of 2018.
“The non-hydrocarbon sector’s growth is anticipated to remain challenged amid the implementation of VAT and planned energy price reforms in 2018, despite some supportive measures by the government to cushion the impact of fiscal reforms,” RAM said.
“Saudi Arabia’s fiscal deficit is forecasted to narrow to a respective 7.5 and 6.3 per cent in 2017 and 2018 after double-digit shortfalls for two consecutive years, largely owing to stronger global oil prices and a growing contribution from non-oil revenue sources such as VAT, excise tax and levies.
“The government is expected to stay committed to its mediumterm Fiscal Balance Programme, although we envisage some variation from initially planned targets, considering the current low-growth environment.
“The government’s improved budgetary control had resulted in significantly lower budget overspending in recent years compared to the historical trend.”
While persistent deficit funding had increased the government’s debt load to a projected 17 per cent of GDP in 2017, RAM said this level is still relatively lower than that of its sovereign peers, and is adequately buffered by the country’s substantial fiscal reserves.
Saudi Arabia’s current account is projected to recover from deficits in the past two years to register respective surpluses of two and 1.5 per cent of GDP in 2017 and 2018, primarily buoyed by a steady increase in hydrocarbon export receipts.
The country maintained a strong net external creditor position with substantial foreign reserve holdings of 82.9 per cent of GDP as at end-2016, which provide healthy financing of current-account purchases of up to 7.1 months. Further, the country’s external debt load is relatively small and remains manageable.
Saudi Arabia’s proximity to insurgency-ridden neighbouring countries poses geopolitical risks. Further, the hostility between Saudi Arabia and Iran has intensified with the former’s deep suspicion of the latter’s role in instigating regional instability. Nonetheless, the country’s strategic ties with most of the Gulf states moderate these risks.
“While the diplomatic rift between Saudi Arabia and Qatar remains unresolved, the economic impact of the dispute is negligible,” RAM said. “Although inter-GCC relations have been increasingly tested, the disintegration of the pact is not within our base expectation.
“While further power consolidation under the Crown Prince enables faster implementation of reforms championed by him, the political status quo has been challenged, which could give rise to near-term uncertainties over business and investment sentiments.”