Saudi Arabia's economy supported by robust government balance sheet and fiscal buffers

Structural reforms and vast hydrocarbon reserves also underpin the kingdom's economic resilience, Moody's says

Jeddah in Saudi Arabia. Moody's said the continuity of the kingdom's reform process will strengthen its fiscal base and cut its reliance on oil. Getty

Saudi Arabia’s economy remains resilient and its credit profile draws strength from a robust government balance sheet with moderate debt levels and its large fiscal reserve buffers, according to Moody’s Investors Service.

Improving institutions, policy effectiveness and the vast stock of proven hydrocarbon reserves with low extraction costs also support the “high economic resilience” of the kingdom, Moody's said in its annual credit analysis of Saudi Arabia.

The kingdom, which is rated “A”, the third highest sovereign credit rating by Moody’s, is implementing structural reforms in the wake of oil price shocks. The continuity of the reform process will not only strengthen its fiscal base but will also help in cut its reliance on oil revenue, the credit rating agency said.

“The positive outlook reflects the increasing likelihood that broad-based structural reforms and investments in a wide range of diversification projects will help reduce significantly the sovereign's economic and fiscal reliance on hydrocarbons over time,” Christian Fang, vice president and senior analyst at Moody’s, said.

If effectively executed and supported by private-sector investment, government-funded diversification projects and initiatives reduce the sovereign's high exposure to oil price cycles and to a potential acceleration in global carbon transition.

The diversification drive will also “diminish the pressure to support its implicit social contract through growing public spending and employment”, Moody’s said.

Saudi Arabia, Opec’s top oil producer, like its peers in the oil-rich GCC economic bloc, has long relied heavily on hydrocarbon revenue to fuel economic growth.

However, in the past decade, the kingdom has embarked on an overarching economic and fiscal reform programme to diversify its economy away from oil.

Saudi Arabia has been spending heavily on expanding its industrial and manufacturing base. It has launched ambitious projects across sectors including travel and tourism, hospitality, and mining and minerals to support the non-oil economic growth, boost local consumption and create jobs.

The kingdom recorded the highest annual growth rate among the world’s 20 biggest economies last year, data from the Organisation for Economic Co-operation and Development showed. The country’s economy expanded 8.7 per cent on higher oil revenue and the robust performance of its non-oil private sector.

Saudi Arabia has carried over the growth momentum into this year. Its economy expanded by 3.9 per cent in the first quarter on an annual basis, as the non-oil sector continued to grow strongly, according to the latest data from the General Authority for Statistics.

The International Monetary Fund expects the kingdom’s economy to grow by 3.4 per cent this year, while the World Bank estimates growth of 2.2 per cent.

Saudi Arabia posted a fiscal surplus of 2.5 per cent of its GDP in 2022, against a deficit of 2.3 per cent of GDP in 2021.

Moody’s expects the government balance sheet to continue to improve in the next few years, based on an oil price assumption of around $85 per barrel this year and $83 per barrel next year, before declining to the $50 to $70 a barrel range in the medium term.

“As a result of the supportive oil prices and taking into account the consolidation measures the government introduced in past couple of years, Moody’s expect Saudi Arabia's fiscal position to be in balance in 2023 and 2024,” the report said.

Saudi Arabia posted a fiscal surplus of 2.5 per cent of its GDP last year, against a deficit of 2.3 per cent of GDP in 2021. Government revenue rose by 31 per cent on an annual basis on substantially higher hydrocarbon revenue stemming from higher oil prices and crude oil production.

Oil prices have dropped since touching the recent peak of $123 per barrel in June last year. Brent, the benchmark for two thirds of the world’s oil, was trading 0.57 per cent lower at $76.52 a barrel at 2.31pm UAE time on Thursday.

Moody’s expects Saudi Arabia's government debt burden to decline to less than 25 per cent of GDP this year and to about 23 per cent of GDP on average in the next two years.

The rating agency said it would upgrade the kingdom’s ratings if it sees “increasing evidence that the diversification efforts and reforms are likely to reduce Saudi Arabia's reliance on oil revenue over the medium term”.

“Such evidence would include a track record of fiscal resilience to oil price cycles and sustained robust growth in the non-hydrocarbon sector of the economy, driven increasingly by private-sector investment,” Moody’s said.