S&P Global Ratings has revised its long-term foreign and local currency unsolicited sovereign credit rating on Saudi Arabia to 'A+' from 'A'. 

 

At the same time, the agency affirmed the 'A-1' short-term foreign and local currency unsolicited sovereign credit rating. The outlook is stable. The transfer and convertibility (T&C) assessment was revised to 'AA-', from 'A+'.

 

The stable outlook reflects the agency's view that strong non-oil growth momentum and developing

domestic capital markets balance risks from rising government and external debt to pursue Vision

2030 goals and debt servicing costs, it said.

 

Rationale

The upgrade reflects the ongoing social and economic transformation in Saudi Arabia is underpinned by improving governance effectiveness and institutional settings, including deepening domestic capital markets, S&P Global Ratings said. 

 

"We believe that institutional checks and balances have become more visible as Vision 2030 progresses, as reflected by the recalibration of project priorities and timelines. This also illustrates some flexibility and coordination in management of capital expenditure and debt issuances. Public and private investments are targeting the development of newer industries, such as tourism, manufacturing, green energy, and mining. The aim is to diversify the economy away from its primary reliance on the hydrocarbon sector. Current investments should boost consumption by Saudi Arabia's largely young population of over 35 million and gradually increase the productive capacity of the economy. 

 

"Over the longer term, we expect that Saudi Arabia will likely emerge a more resilient and diversified economy, with stronger job creation for the young population, and broader workforce participation."

 

However, the agency expects current sensitivity to oil prices will weaken fiscal and external imbalances

through 2028. It assumes that oil prices will fall to $70 per barrel (/bbl) over 2025-2028, from

$81/bbl in 2023. At the same time, the announcement of a decline in Saudi Aramco dividends by one third in 2025 will further dampen oil revenue. The fiscal deficit is expected to widen to 4.8% of GDP this year, from 2.8% in 2024, it said.

 

Funding needs across the government, government-related entities (GREs), and banks are large, given the sheer scale and size of Vision 2030 projects-- estimated at above $1 trillion in total.

 

"However, we assume a more gradual pace of borrowing and execution of investments. As a result,

we project that the government's net asset position will gradually fall, but remain comfortably

strong, at about 32% of GDP in 2028. Similarly, we expect that the country will remain in a net

external creditor position over the next four years, despite a significant increase in external

financing needs. In 2024, we estimate that gross external debt increased by 10 percentage points

to 39% of GDP, reflecting net new external debt of $36 billion by banks, $19 billion by the

government, close to $10 billion by the Public Investment Fund (PIF), and $9 billion by Saudi

Aramco," it said.

 

Large hydrocarbon reserves and low production costs provide Saudi Arabia some resilience to a global energy transition to low-carbon alternatives, especially in a future scenario where fossil

fuel demand will largely be met by a smaller number of the most efficient producers, the agency said.

 

Notwithstanding the increasing influence of non-Opec producers such as the US, Saudi Arabia

maintains its position as the world's largest swing oil exporter (with spare installed production

capacity permitting it to cut or raise production levels relatively quickly). Saudi Arabia also retains

a leadership role in OPEC+ and its resulting ability to influence global oil price trends.

 

Strong non-oil growth and rising oil volumes from 2025 will support medium-term growth prospects, it said and projected:

* Strong real GDP growth averaging 4% over 2025-2028.

* Continued momentum for investment in construction and the services sector, supported by consumer demand.

* Socioeconomic reforms and recalibrated project implementation reflect a gradual

strengthening of institutional settings. 

 

Downside scenario

S&P Global Ratings said it could lower the ratings if the pace of debt accumulation across the government and other sectors increased beyond its expectations and significantly weakened public finances and the external position of the country. This could be the case if it saw a combination of a sharp ramp-up in investment projects funded by debt, along with a slowdown in growth, higher

borrowing costs, and unfavourable movements in oil prices.

 

Upside scenario

The agnecy said it could consider a positive rating action over the next two years if reforms and robust non-oil activity lead to steady growth in GDP per capita, along with stronger private and foreign

investment flows that reduce pressure on public spending.- TradeArabia News Service