S&P revises Saudi outlook to stable from positive

S&P revises Saudi outlook to stable from positive
Updated 06 December 2014

S&P revises Saudi outlook to stable from positive

S&P revises Saudi outlook to stable from positive

Standard & Poor's Ratings Services has revised its outlook on Saudi Arabia to stable from positive. At the same time, the "AA-/A-1+" long- and short-term foreign and local currency sovereign credit ratings on the Kingdom were affirmed.

Rationale
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.

Outlook
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.