S&P revises Saudi outlook to stable from positive
S&P revises Saudi outlook to stable from positive
We indicated on June 6, 2014, that we could revise our outlook on Saudi Arabia to stable if we anticipated that weaker economic growth or sustained lower oil prices could lead to GDP per capita that was not commensurate with an improved assessment of economic structure and growth prospects, one of the five key factors that form the foundation of our sovereign credit analysis. We base our outlook revision on our view that, although real economic growth remains relatively strong, we think Saudi Arabia is unlikely to achieve sufficient levels of nominal income to raise the ratings over the next two years. We assume a Brent oil price of $80 per barrel in 2015 and $85 in subsequent years, which will place pressure on the GDP deflator because Saudi Arabia derives about 45 percent of its GDP from the hydrocarbons sector. We now estimate GDP per capita at $23,400 in 2014-2017, down from our June assumption of $25,600. Trend growth in real per capita GDP, which we measure using 10-year weighted-average growth, amounts to about 2 percent during 2008-2017. This is in line with peers that have similar GDP per capita.
The ratings are supported by the very strong external and fiscal positions Saudi Arabia has built up over many years. By managing high oil revenues prudently, the general government has retired virtually all of its debt, generating additional fiscal space for countercyclical policies. We estimate
the general government's net asset position at 118 percent of GDP on average during 2014-2017. Over the same period, we expect Saudi Arabia's external debt, net of liquid external assets, will remain strong, averaging about 210 percent of current account receipts (CARs). The country's external liquidity is similarly strong, with gross financing needs averaging 78 percent of usable reserves and CARs by our estimate.
We note that government reforms are resulting in some improvements to the highly segmented labor market. Saudi nationals' share of private sector employment increased to 15 percent in 2013 from 13 percent in 2012, and women's share of total employment increased to 9.4 percent from 7.7 percent. However, the unemployment rate remains high for Saudi nationals, standing at 11.7 percent compared with 0.2 percent for non-Saudis, leading to an overall 5.6 percent rate in 2013.
We think uncertainty remains regarding whether the private sector can generate enough sufficiently attractive jobs for to absorb the expected significant inflow of Saudi nationals into the labor market in the coming years.
We view Saudi Arabia's economy as undiversified and vulnerable to a sharp and sustained decline in the oil price, notwithstanding government policy to encourage nonoil private sector growth. The hydrocarbon sector accounts for about 44 percent of GDP. However, we find that the non-hydrocarbon sector relies to a significant extent on government spending (funded by hydrocarbon revenues) and downstream hydrocarbon activities. About 85 percent of exports and 90 percent of government revenues stem directly from the hydrocarbons sector. In its October 2014 Regional Economic Outlook, the International Monetary Fund indicated that Saudi Arabia's fiscal breakeven oil price will rise to $106 per barrel in 2015 from $98 per barrel in 2014 and $89 per barrel in 2013. This is the oil price necessary to balance the government's budget, all other things remaining equal.
The stable outlook reflects our view that Saudi Arabia will keep its very strong fiscal balance sheet and net external asset position, while monetary policy flexibility remains limited and dependence on income from the hydrocarbons sector stays high.
We could consider a positive rating action if, contrary to our current expectations, economic growth were to support further increases in Saudi Arabia's per capita GDP to levels that would qualify for an improved assessment of economic structure and growth prospects as defined in our criteria.
EIBank chief on how to handle geopolitical headwinds
- Sifri says Gulf region has lots of positive attributes to serve the internationally wealthy community, more so now with Saudi Arabia opening up to foreign investment
- "Saudi Arabia is going through a significant transition which happens to coincide with a sudden change in the ruling conditions"
DUBAI: Khaled Sifri, chief executive of Emirates Investment Bank, uses two words much of the time: Headwinds, and geopolitics. It turns out they are virtually synonymous for him.
Sifri is in a good place to judge the financial scene in the UAE and the region. The bank, one of the oldest financial institutions in the Emirates, provides investment banking and wealth management expertise for some of the top business families and institutions in the Gulf.
Just recently, he announced a big jump in half-year profits, but was at pains to point to the “headwinds” the bank was continuing to battle in the regional and global economic environments.
“The region has lots of positive attributes to serve the internationally wealthy community. Sooner or later it will be recognized as a wealth management hub, especially Dubai, and they will see the opportunities of investing in and from the region. All the more so now that Saudi Arabia has opened up to foreign investment,” he said.
Sifri reeled off the positives in the region’s investment architecture: Its location between the big wealth management centers of Singapore and Switzerland; its low tax regime; its more understanding regulatory regime compared with the West.
But then come the headwinds and geopolitics. “All these are the positives, but the geopolitics of the region often make it harder for the wealthy to view it as an alternative,” he said.
“The whole world is going through a big transition. The information revolution, the global financial crisis, even back as far as the demise of the Soviet Union. Trump, Brexit — is that not enough headwind? I have a negative view of Trump’s rhetoric,” he added.
Nonetheless, Sifri believes the region can overcome these challenges because of the unique advantages it enjoys.
“The wealthy are concerned about tax, so they want to open for low tax jurisdictions like Dubai. That’s why many of them decide to become residents. Also many of them are aware of the heavy regulatory structure in Western markets, and that scares them away, too.
“There are tough rules in the West, and investors end up spending a lot of time and money on lawyers, regulators and compliance people. It is diverting business away from those places. London and New York, too, are being so difficult with compliance that they are throwing the baby out with the bath water,” he said.
It is not that Dubai and the other financial centers in the region welcome any investor regardless of reputation or background, but rather a different approach to the whole process of compliance and due diligence.
“In Dubai, we still have to be vigilant in terms of regulations, but we make an effort to sieve through the clients to separate the acceptable ones from the non-acceptable. The regulatory environment here is just as strict as elsewhere, but it is our willingness to go the extra mile to get to know the client. We spend a lot of money on due diligence and compliance,” he said.
Some analysts have recently added another “headwind” to the region’s challenges, especially in the UAE — a suggestion that key areas of the economy, from real estate to the retail environment through to tourism, are not performing in top gear.
Sifri does not agree with the pessimists. “On the local economy, the numbers from the IMF (International Monetary Fund) are probably more reliable than a view based on your choice of time to go to the mall. And the numbers suggest a positive view on the regional and local economy.
“The evidence on the streets of Dubai is probably more related to a supply overhang of goods and services, along with a reduction in demand. The supply side has built up massively in Dubai and Abu Dhabi, related to the growth in infrastructure and real estate,” he added.
But he recognized that there are some issues still to be resolved, especially in the property market. “Real estate is where the impact is greatest from the supply/demand formula. Dubai is in a particular condition because real estate increased dramatically as the emirate opened up. The cost of living has gone up quite a bit, and that is beginning to have an impact on life in Dubai,” he said, referring to a recent decision by Amazon to locate big chunks of its regional operations in Bahrain as a sign that the UAE is becoming an expensive place to do business.
Sifri believes that recent actions on fees, charges and levies in the UAE are positive signs that the issue is being addressed.
“I don’t want to look like I’m advising the government what to do, but in the region there have been two choices: The government can put limits on prices for schools and rents, for example. We saw it in Kuwait, where rents have been capped for a long time in some places.
“In the UAE the government has generally taken a view that it should not force prices down, but instead chose to increase the supply of goods and services. In the education sector, there has been a cap put on fees, but that is intended to address only a handful of schools that are top-end and especially in demand,” he said.
Many of EIB’s clients are wealthy Saudi Arabian investors, so he has had an opportunity to gauge the investment environment in the Kingdom as the big transformation of Vision 2030 kicks in.
“Saudi Arabia is going through a significant transition which happens to coincide with a sudden change in the ruling conditions. The Crown Prince Mohammed bin Salman is introducing dramatic changes, all of which appear to be positive. But there is a sensitivity about changing too fast.
“The aspirations are in the right direction and have broad support in the Kingdom and across the region. The majority of people want their aspirations to be fulfilled,” he said.
“But the bigger question is how and how long it will all take. Is it a long road to transformation, or is there a short cut? It’s like crossing the Grand Canyon: Do you go straight down and up in a straight line, or is it better to go around the valley to find an easier path?” Sifri asked.
He thinks the direct approach has advantages. “There was definitely a need to do something dramatic in the Kingdom. In the past, policy has been to change incrementally, like walking round the valley.
“The economic opportunity for investors is very significant, but it also carries a significant amount of risk, and each investor needs to decide what level of risk they are conformable with. The geopolitical environment is one of these risks and might deter some investors. As a bank, we’re quite bullish on the KSA economy. It is a meaningful part of our business. We believe it will succeed in overcoming the geopolitical factors,” he said.
Sifri said that he had detected no signs of what some analysts have called “capital fight” on the part of Saudi investors. “No, we have not seen that. In fact, many prominent Saudis are pulling capital back in to the country. We have seen some repatriate capital recently. With complete sincerity, we have not seen any capital flight,” he said.
Inflows and outflows of capital are, in any case, a historic phenomenon in the Middle East, which are determined by global rather than regional conditions, he said. But these would not halt the region’s long-term ambition to be a leading wealth management center, with local and regional institutions in the vanguard of that trend.
“People have decided they had more control over their assets in a local bank. Even if they are doing international investments from a base here, they have more control over the relationship,” he said.
By way of illustration, Sifri told an anecdote about an important regional client who explained why he wanted to deal with a regional bank. “He said to me: ‘If you do something with my money I don’t approve of, even if I may not know your chairman personally, I will certainly know somebody who does. If anything goes wrong in a Swiss bank, I do not have that kind of control,’ he told me. That’s a big attraction,” Sifri added.