MANAMA: With Standard & Poor’s Ratings Services affirmed its long- and short-term foreign and local currency sovereign credit ratings on the Kingdom of Saudi Arabia at AA-/A-1, said that it would expect 6% of budget deficit of GDP in 2015. The outlook remains negative.
The ratings are supported by the very strong external and fiscal positions Saudi Arabia has built up over several years. By managing high oil revenues prudently, the general government has retired virtually all of its debt. We estimate the general government’s net asset position at close to 110% of GDP on average during 2015-2018. Notwithstanding our assumption that the Brent oil price will average about $68 per barrel by 2015-2018, we expect that Saudi Arabia’s current account surpluses will average 3% of GDP and liquid external assets, net of external debt, will remain strong, averaging about 200% of current account receipts (CARs) over the same period.
“Nevertheless, we expect a gradual deterioration in Saudi Arabia’s fiscal performance over the period to 2018. The government’s 2015 budget suggests a general government deficit of about 6% of GDP in 2015. However, in our view, the deficit could be around double that amount, based on our oil price assumptions and the government’s social, investment, and defence spending priorities. We think the government could face sustained fiscal deficits over the ratings horizon to 2018. Financing these deficits is likely to result in a pronounced decrease in the government’s net asset position and/or an increase in the government’s currently very low debt burden.
“Sustained high oil prices over the past few years have helped bolster financial buffers, accumulating government liquid assets that we estimate will average about 115% of GDP in 2015-2018. In our opinion, this level of assets significantly offsets the concentration risk related to the economy’s hydrocarbon dependency. However, we could reassess our view that the government has an exceptional buffer to offset most economic or financial shocks should liquid government assets fall significantly below 100% of GDP.
“The large public investment program (just over 30% of all central government spending is capital expenditures) could provide the Saudi authorities with fiscal flexibility to react to the deteriorating terms of trade and concomitant detrimental government revenue trends. However, this would come at the cost of slower economic growth and progress in implementing the official economic diversification strategy.
“We understand that Saudi Arabia is the oil producer with the largest estimated amount of spare oil production capacity globally. In our view, this could provide it with an additional layer of fiscal and external flexibility that other oil producers lack.
“We estimate GDP per capita at $21,000 in 2015. We estimate that trend growth in real per capita GDP, which we measure by using 10-year weighted-average growth, will amount to about 1% during 2009-2018, which is relatively weak compared with peers that have similar GDP per capita.
“Saudi Arabia derives about 40% of its GDP, 90% of government revenues, and 85% of exports from the hydrocarbons sector. We view Saudi Arabia’s economy as undiversified and vulnerable to a steep and sustained decline in the oil price, notwithstanding government policy to encourage non-oil private sector growth. We find that the non-hydrocarbon sector relies to a large extent on government spending (funded by hydrocarbon revenues) and downstream hydrocarbon activities.
King Abdullah passed away on Jan. 23, 2015. The succession of his 79-year-old half-brother, King Salman, proceeded smoothly. On April 29, 2015, King Salman promoted his nephew, interior minister Mohammed bin Nayef–the deputy crown prince since January 2015–to the position of crown prince, first in line to the throne. The king is believed to have adhered to the strictures of the Allegiance Council established in 2007, which formalized the procedure of appointing a crown prince. The king also named his son Mohammed bin Salman, the defense minister, to the position of deputy crown prince and second in line to the throne.
“In our view, when the scepter is passed from a son of King Abdulaziz Al-Saud, who established the kingdom in 1932, to the next generation of rulers, reconciling the concerns and opinions of the extended Al-Saud family could become more challenging. So far, only the sons of King Abdulaziz have ruled after him. Our institutional assessment remains neutral for the rating.
“In our view, Saudi Arabia is an absolute monarchy in which decision-making is highly centralized with the king and the ruling family. We find that this could make future policymaking more difficult to predict. Political institutions are still at an early stage of development compared with those of non-regional peers in the ‘AA’ rating category.