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Fitch affirms Saudi Arabia's rating at 'AA-'

Fitch Ratings has affirmed Saudi Arabia's Long-Term foreign and local currency Issuer Default Ratings (IDRs) at "AA-". The Outlook is Positive. Fitch has also affirmed Saudi Arabia's Country Ceiling at "AA" and Short-Term foreign currency IDR at "F1+".
Fitch Ratings said Saudi Arabia's external balance sheet has been bolstered so far in 2013. Central bank net foreign assets, the bulk of sovereign foreign assets, are up by 4.4 percent of GDP over the first seven months of the year and with no sovereign external debt, the net external creditor position is likely above 100 percent of GDP (from 96 percent of GDP at end-2012). Double-digit current account surpluses are expected each year to 2015, which will further bolster the external position.
Fiscal buffers have been enhanced, with rising government deposits and falling government debt over the first seven months of the year reinforcing a net creditor position that is the second-strongest of all Fitch-rated sovereigns. Lower oil prices will narrow, but not eliminate, the fiscal surplus by end-2015, when the fiscal breakeven oil price is forecast at $86 a barrel, compared with a Fitch-estimated 2012 level of $76 a barrel.
Commenting on the Fitch report, John Sfakianakis, chief investment strategist at Masic, a Riyadh-based investment firm, said: “The rating is one of several assessments that confirm Saudi Arabia's solid macro economic picture. Debt is one of the lowest in the world which confirms the efforts of the Ministry of Finance to lower liabilities to the lowest bearable level.”
He said: “The next step for the rating agencies would be to affirm Saudi Arabia's rating upgrade which would reflect a closer reality of the very positive picture that the economy demonstrates over a sustainable and long period.”
Economic growth is robust, particularly for the nonoil sector. Real GDP growth slowed to 2.4 percent yoy over H1, 2013, compared with an average over the past five years of 4.6 percent, due to lower oil production. Nonoil growth was 4.5 percent in H1, 2013 and is on track to outpace oil sector growth for the seventh year of the past nine in 2013. Real nonoil growth is forecast to exceed 5 percent in 2014 and 2015, diversifying the economy. Oil accounts for around half of GDP and oil revenue-funded government spending has been a major stimulus for the private sector.
Labor market reforms are contributing to a significant increase in the number of Saudi nationals employed in the private sector. Although the unemployment rate was unchanged in Q1, 2013, this likely reflects an increase in labor force participation, as the number of nationals working in the private sector was up by 21 percent in the first seven months of the year. New moves to correct the status of expatriates and bolster training for job seekers will assist in policy formulation and labor market clearance and should help the authorities to deal with what Fitch considers a potential source of social stress.
Indicators of the health of the banking sector strengthened over H1, 2013. Capital adequacy and loan-loss coverage were up (at 17.9 percent and 166 percent, respectively) and NPLs had fallen to 1.63 percent. Banks remain liquid and the sector is well regulated. Risks arising from the banking sector are judged to be low.
The economy is heavily dependent on oil. Oil accounts for 90 percent of fiscal revenues and 80 percent of current account revenues, levels that are little changed over the past decade. However, large and growing buffers mean it would take a prolonged period of much lower oil prices to materially undermine the fiscal and external positions. Oil reserves are large and the Kingdom maintains substantial spare capacity that it uses to smooth disruption to production elsewhere.
Exposure to geopolitical risks is high relative to peers as Saudi Arabia is a big player in a turbulent region. There is heightened uncertainty about the course of events in Syria and instability and threat of conflict in other parts of the region. In common with other GCC members, voice and accountability and other governance indicators score weakly according to World Bank measures, though steps are being taken to tackle some potential sources of domestic social strains.
Fitch considers the exchange rate peg to the US dollar to be a key policy anchor, even though it constrains policy flexibility. Transparency on fiscal policy and outturns is a weakness relative to peers and overspending is common.

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