S&P affirms Saudi Arabia’s credit rating on growth prospects and spending boost

S&P Global Ratings affirmed Saudi Arabia’s credit rating with a stable outlook on the expectation that economic growth will accelerate in this year as the world’s biggest oil exporter continues to boost spending.

“The stable outlook is based on our expectation that economic growth will accelerate moderately in 2018, supported by rising government investment,” Benjamin Young and Trevor Cullinan, Dubai-based analysts at S&P, said in a report.

Saudi Arabia’s economy is expected to grow 2 per cent this year after contracting 0.7 per cent last year.

The A-/A-2 foreign and local currency credit ratings put Saudi Arabia firmly in the investment grade category, suggesting that it’s unlikely the government would default on its financial obligations.

The ratings are particularly watched by bond holders as a way to measure the risk on credit sold by the government and corporations.

While Saudi Arabia hasn’t been traditionally active in the international bond market as a seller, in recent years it has stepped up sales of conventional and Sharia-compliant bonds to help plug a budget deficit caused by the three-year slump in oil prices that began in 2014. The Saudi Arabian government sold US$17.5 billion in bonds in its first international sale in 2016. The kingdom plans to borrow about $31bn this year to bridge an expected budget deficit of $52bn and fund its growth plans, according to Bloomberg News. It raised about $36bn last year, $14bn of which was from domestic bonds and $22bn from international debt capital markets.

Cuts in some state subsidies and the levying of 5 per cent VAT in January to generate much needed non-oil revenues are some of the other measures Riyadh has taken to bring stability to state finances.

“Saudi Arabia has articulated an ambitious strategy to reduce the economy’s dependence on oil and imported labour to transform the domestic education and job market and to consolidate the budget,” the S&P report said.