November 2, 2017 / 2:50 PM / a year ago

Fitch Affirms Saudi Arabia at 'A+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, November 02 (Fitch) Fitch Ratings has affirmed Saudi Arabia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS Saudi Arabia's ratings are supported by strong fiscal and external balance sheets, including exceptionally high international reserves, low government debt, significant government assets and strong commitment to an ambitious reform agenda. These strengths are balanced by high oil dependence, the prospect of slow non-oil growth, weak World Bank governance and business environment indicators and large fiscal deficits. The central government deficit is expected to narrow to 8.7% of GDP in 2017, from 17.2% in 2016, largely as a result of higher oil prices and because clearance of arrears that widened the 2016 deficit by 4.4% of GDP will no longer be necessary. The deficit will shrink more moderately in subsequent years to 5.4% of GDP in 2019. The government has indicated that expenditure may rise 4% next year, but a number of revenue measures should still lead to a significant improvement of the fiscal position. The government increased excise duties in June and expat levies in July and is still expected to raise energy costs before the end of the year. A 5% value added tax will be introduced at the beginning of 2018 and further energy price reforms and expat levies are also planned. The measures are part of the government's ambitious reform agenda, the Vision 2030, which seeks to put public finances on a sustainable basis but also aims to reduce the dependence of the government on oil revenue. The planned sale of a 5% stake in Saudi Aramco will primarily be used to fund domestic investments to diversify the economy. As such it is likely to have a limited impact on the government's balance sheet. The government is also pursuing the privatisation of other state entities and seeks to attract private financing for a wide range of projects. There is a risk that the government may need to step in if private sector financing fails to materialise for some projects or revenue assumptions for public private partnership projects prove optimistic. The government has financed its deficits by a combination of running down its deposits at the Saudi Arabian Monetary Authority (SAMA, the central bank) and by issuing domestic and external debt. As a result, general government deposits with SAMA are expected to continue declining, albeit at a slower pace, to 20.7% of GDP by 2019 from a peak of 57.7% in 2013 and 35.2% at end-2016. Meanwhile, central government debt is expected to rise to 24.9% of GDP in 2019, from 1.6% in 2014 and 13.1% in 2016. But at 19.1% of GDP in 2019, general government debt (excluding debt held by government entities) will still be well below the 'A' category median of 44.3%. The recovery of oil prices has led to a sharp improvement in the current account balance, which is expected to be broadly balanced in 2017 and 2018 after a deficit of 4.3% of GDP in 2016. Nonetheless, international reserves have continued to decline, by USD51 billion during the first nine months of 2017, partly reflecting large errors and omissions. However, at 23 months of current external payments, SAMA reserves are well above the 'A' category median of five months. Fitch expects GDP to contract 0.4% in 2017 as a whole, as OPEC oil production cuts outweigh a recovery in non-oil GDP induced by less tight fiscal policy, the stimulus from the payment of arrears at end-2016 and improved confidence. GDP should increase 0.8% in 2018, held back by non-oil revenue measures, and 1.3% in 2019. Inflation has remained negative during the first three quarters of 2017, but is likely to rise substantially as a result of energy price hikes and the new VAT. Fitch assigns Saudi Arabia's banking sector a Bank System Indicator of 'a', with only four jurisdictions receiving a higher rating. This reflects stable profitability, which has allowed the sector to build sizeable capital buffers against any downturn in the operating environment. The sector Tier 1 regulatory capital ratio was 17.2% at end-June 2017. A change in the royal succession announced in June has put Mohammed bin Salman, the main driver behind the Vision 2030, next in line for the throne. This has reduced risks to the implementation of the reform agenda. However, risks that the line of succession is challenged remain and the ambition for wider social reform could also lead to increased resistance from conservatives. The boycott of Qatar by Saudi Arabia and several other countries in the region are unlikely to have a significant economic impact on Saudi Arabia. However, the drastic measure increases risks that tensions with Iran could escalate suddenly. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Saudi Arabia a score equivalent to a rating of 'A-' on the Long-Term Foreign-Currency (LT FC) IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: Public finances: +1 notch, to reflect the large government deposits held with SAMA as well as other government assets. External finances: +1 notch, to reflect the large size of sovereign net foreign assets, largely held as international reserves and the strong net external creditor position. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The following factors could, individually or collectively, trigger negative rating action: - Extended erosion of the fiscal or external positions, for example as a result of a failure to implement fiscal reforms or due to a renewed fall in oil prices; and - Spill-over from regional conflicts or a domestic political shock that threatens stability or affects key economic policies or activities. The following factors could, individually or collectively, trigger positive rating action: - Fiscal reforms or an extended improvement in oil prices that are sufficient to put the budget on a path to a surplus and to reverse the decline in the government's net creditor position. KEY ASSUMPTIONS Fitch forecasts Brent crude oil prices to average USD52.5/b in 2017 and 2018 and USD55/b in 2019. The full list of rating actions is as follows: Long-Term Foreign- and Local Currency IDRs affirmed at 'A+'; Outlook Stable Short-Term Foreign- and Local Currency IDRs affirmed at 'F1+' Country Ceiling affirmed at 'AA' Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'A+' Issue ratings on KSA Sukuk Limited global trust certificates (sukuk) affirmed at 'A+' Contact: Primary Analyst Jan Friederich Senior Director +852 2263 9910 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Krisjanis Krustins Associate Director +852 2263 9831 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Sukuk Rating Criteria (pub. 14 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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