Fitch Affirms Saudi Arabia's rating at 'A+'; outlook remains stable

Fitch Ratings has affirmed Saudi Arabia's Long-term ForeignCurrency Issuer Default Rating (IDR) at 'A+' with a stable outlook.

Saudi Arabia's ratings reflect its strong fiscal and external balance sheets, with government debt-to-gdp ratio and sovereign net foreign assets (SNFA) considerably stronger than both the 'A' and 'AA' medians, Fitch said in a press statement.

As per the rating agency, the kingdom has significant fiscal buffers in the form of deposits and other public sector assets.

'Oil dependence, low World Bank governance indicators and vulnerability to geopolitical shocks remain relative weaknesses. Nonetheless, governance is improving with social and economic reforms and efforts to bolster effectiveness across government institutions,' Fitch said.

Saudi Arabia's foreign reserves excluding gold declined moderately in 2023, to $437bn, as financial account outflows in the form of investments abroad outweighed the current account surplus, which narrowed to an estimated 4.5% of GDP due to lower oil revenue and high imports.

Fitch forecasts reserves to decline to an average of $420bn in 2024-2025, as the current account surplus narrows on the assumption of lower oil revenue, but that outward investments by large institutions such as the Public Investment Fund (PIF) and pension funds moderate.

As per Fitch's analysis, Saudi Arabia's gross government debtTO-GDP ratio rose to 26.5% of estimated GDP in 2023, but remained low, at roughly half the 'A' median of 50%.

The rating agency forecasts that government debt-to-gdp ratio will increase to 28% in 2024 and 30% in 2025. This assumes that Brent crude oil prices average $80 per barrel in 2024, $70 per barrel in 2025, contributing to budget deficits and constraining nominal GDP. Fitch assumes deficits are funded by borrowing, rather than asset drawdowns.

'We estimate that government deposits at the Saudi Central Bank, comprising the government current account and the fiscal reserve, were close to SAR450BN (11.4% of GDP) at end-2023. This represents a significant fiscal buffer and puts net government debt at 15.1% of GDP.'

Saudi Arabia's 2024 budget projects fiscal deficits over the medium term, of around 2% of GDP, marking a shift away from the previous set of medium-term figures that projected annual surpluses and a decline in government debt-to-gdp ratio.

According to Fitch, spending ran 14% ahead of budget in 2023 and in the latest projections spending in 2025 will be 15% higher than previously planned. This policy recalibration reflects a decision to make more use of the fiscal space to support strong non-oil economic growth and press ahead with economic and social priorities under the Vision 2030 strategic development plan.

'We forecast a budget deficit of 2.3% of GDP in 2024, similar to 2023 and slightly ahead of the 1.9% of GDP budget plan. We expect spending 3.5% above budget, at SAR1.3TN on higher capex and procurement,' the rating agency said.

Fitch noted that Saudi Arabia's oil dependence remains a rating weakness. Oil revenue will account for around 60% of total budget revenue in 2024-2025 (albeit down from 90% 10 years ago) and oil GDP 30% of total nominal GDP.

'Saudi Arabia's fiscal breakeven oil price for the budget has risen in recent years and we forecast it will remain above $90 per barrel in 2024 before falling to $85 in 2025. A $10 per barrel movement in oil prices impacts our budget forecast by 2%-2.5% of GDP, holding other factors constant. A change in oil output by 500,000 bpd impacts the budget by around 1% of GDP,' Fitch expalined.

However, as Fitch said, an increase in public sector investments, combined with a raft of social and economic reforms has boosted the country's non-oil economy. Fitch projects real growth of 4.5% in the non-oil sector (excluding government) in 2024-2025, following an average of around 5% in 2022-2023.

'Growth will be supported by public sector investments, business environment reform, gradually lower interest rates, robust credit growth, ongoing development of retail and tourism sectors and employment gains among Saudis and expats,' the rating agency added.

Fitch expects Saudi Arabia’s oil dependence to remain a rating weakness. Oil revenue will account for around 60% of total budget revenue in 2024-2025 and oil GDP 30% of total nominal GDP