NEW YORK: Standard & Poor’s Ratings Services on Friday said it had affirmed its ‘AA-’ long-term and ‘A-1+’ short-term foreign and local currency sovereign credit ratings on the Kingdom of Saudi Arabia.
The outlook is stable. The Transfer & Convertibility (T&C) assessment on Saudi Arabia remains ‘AA+’.
“The ratings on Saudi Arabia reflect our view of the government’s extremely robust external and fiscal positions,” Standard & Poor’s credit analyst Farouk Soussa said. “Saudi Arabia currently enjoys an exceptional amount of fiscal flexibility to allow it largely to shield the local economy from the full impact of the global recession, primarily through the pursuit of expansionary fiscal policy.”
Driven by high oil receipts over the past few years and the cautious approach of the Saudi Arabian Monetary Agency (SAMA) toward foreign reserves management, foreign reserves and liquid foreign assets managed by SAMA stood at $438 billion at year-end 2008 (up from $136 billion in 2004), which is sufficient to cover about 24 months of current account payments (including private transfers).
Furthermore, the central government has no external debt and has no plans to incur any. The ratings agency expects fiscal outturns to weaken in 2009 — in line with falling oil prices and revenues and the government’s deliberate countercyclical expansionary fiscal policy — with total expenditure expected to rise by 16 percent relative to the 2008 budget.
Importantly, a large part of that rise will be due to greater infrastructure expenditure, which is budgeted to increase by over 36 percent in 2009. As a result, the general government budget, which has averaged a surplus of over 20 percent in the past four years, is projected by the government to record a deficit of 8 percent of GDP, although with the recent rise in oil prices we expect the budget to roughly balance in 2009. In any event, S&P believes the near-term threat to public finances from any possible fall in oil prices is wholly mitigated by the extent of the government’s fiscal reserves. The agency said Saudi Arabia’s main domestic challenge is dealing with the country’s demographic dynamics. One-half of the population is under 21, and thousands of youths enter the labor market each year, yet foreign workers are filling the vast majority of the new jobs created on the back of the current investment surge.
These positions are either undesirable to Saudis (such as in construction work), or require skills that not many possess. In response, the authorities, often in partnership with the private sector, have established a number of new further education institutions and revived the overseas scholarship program. How successful these measures will be in increasing employment among nationals is yet to be seen, but the issue remains a top government priority.
The ratings on the Kingdom are constrained mainly by the high levels of external geopolitical risks that affect all countries in the Gulf region.
The stable outlook reflects Saudi Arabia’s exceptionally strong balance sheet and the government’s success with its ambitious and broad-based reform effort on the one hand, and high regional geopolitical risks on the other.
