Dagong Maintains the Sovereign Credit Ratings of Saudi Arabia at AA- with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
April 20, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of the Kingdom of Saudi Arabia (hereafter referred to as “Saudi Arabia”) at AA-, each with a stable outlook. The repayment environment of Saudi Arabia is widely stable. Although the country’s wealth creation abilities are constrained by its single industrial structure and thereby render Saudia Arabia highly vulnerable, yet growing domestic demand and pickup in international oil prices have brought about economic recovery. Fiscal deficits continue shrinking while sufficient financial reserves, proper financing channels as well as relatively low debt loads all contribute towards rendering government solvency stable.
The key reasons for maintaining the sovereign credit ratings of Saudi Arabia are laid out below:
First, Saudi Arabia’s political situation is stable, whereas geopolitical risks pose a threat to the country’s repayment environment. The heir to the throne has assumed power and reinforced his centralized control by means of reform on power structure, thus the domestic political situation is stable. However, given Yemen’s continued war and the West having cut diplomatic relations with Qatar, geopolitical risks are mounting. That, coupled with long-standing religious strife and terrorism, presents threats against the stability of Saudi Arabia’s repayment environment.
Second, international oil prices and fiscal stimuli cause Saudi Arabia’s short-term growth rate to rise, yet in the medium and long term, its economic position will be vulnerable. In the near term, Saudi Arabia’s economy will return to low growth resulting from slow recovery in global oil prices and government investment, thus it is forecasted that in 2018 and 2019, the country will register a growth rate of 1.5% and 2.0%, respectively. In the medium and long term, it is hard to envision visible improvements in its economic structure wherein Saudi Arabia relies heavily on oil, leading to significant external vulnerabilities. Nevertheless, the slow progress of diversification is likely to sustain a growth rate of around 2.3%.
Third, the country’s narrowing fiscal deficits, sufficient fiscal reserves and smooth financing channels can guarantee stable repayment sources. In the short term, fiscal spending will increase as the government advances economic diversification, yet fiscal revenues will go up dramatically as a result of global oil prices on the rebound, as well as tax reform. Therefore, in 2018 and 2019, the Saudi Arabian general government primary fiscal deficit will respectively further fall to 9.7% and 8.1%, while the ratio of general government financing needs to fiscal revenues will decline to 33.8% and 27.7%. The government has slowed its pace of utilizing financial assets and the Sovereign Wealth Fund could offer adequate cushion for the government. That, combined with smooth financing channels, leads to stable repayment resources.
Fourth, relatively low debt loads and sufficient reserves stabilize government solvency. Continuing fiscal deficits cause government debt to increase. It is expected that in 2018 and 2019, the ratio of Saudi Arabia’s general government debt burden to fiscal revenues will rise from 62.7% in 2017 to 75.5% and 86.7%, respectively. Comparatively low debt loads and relatively sufficient official reserves allow government solvency in local currency to remain stable. In the short term, improved trade balance will enable Saudi Arabia to run a small surplus in current account while foreign exchange reserves’ coverage on total foreign debt declines - despite value still as high as 326.6%. As a result, government solvency in foreign currency is sound.
In the short term, Saudi Arabia’s fiscal deficit will continue falling given its diversified fiscal revenues and presently rising international oil prices. Government debt will increase at a slower rate and remain at a relatively low level. Sufficient fiscal and international reserves can assure government repayment in the short term. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for Saudi Arabia in the following one to two years.