Credit rating agency Moody's Investors Service has reaffirmed Saudi Arabia's credit rating at A1 and maintained a positive outlook owing to its large and wealthy economy supported by its vast hydrocarbon reserves, policy effectiveness and the government's balance sheet, including large foreign currency buffers.
However, the sovereign is exposed to cyclical declines in oil demand and prices and to longer-term risks stemming from the global carbon transition due to its "heavy, although gradually declining" economic and fiscal reliance on the hydrocarbon sector, the New York-based credit rating company said in a statement.
Saudi Arabia is also exposed to longstanding regional geopolitical risks, the agency added.
"While oil production cuts are weighing on headline economic growth, Moody's expects Saudi Arabia's real gross domestic product to expand by 2 per cent to 2.5 per cent in 2024 and around 5 per cent in 2025, led by robust economic activity in the non-hydrocarbon sector," the report said.
"The ongoing implementation of large diversification projects will continue to support non-hydrocarbon real GDP growth in the coming years because they are designed to be modular and will be commercialised in phases."
Saudi Arabia, the Arab world’s largest economy, has been focusing on diversifying its economy away from oil as part of its Vision 2030 agenda.
Its economy contracted in the first quarter of the year on the back of a slump in the oil sector, despite an expansion in non-oil activities during the period.
The kingdom's real GDP contracted by 1.8 per cent annually in the January-March period, according to flash estimates released by the General Authority for Statistics.
This decrease was primarily driven by a 10.6 per cent decline in oil activities, it said. Non-oil activities increased by 2.8 per cent and government activities grew by 2 per cent on an annual basis.
The country has been reducing crude output along with other members of the Opec+ alliance as part of efforts to “balance the market”.
All voluntary oil production cuts in Saudi Arabia will remain in place until the end of this year, before the cuts are gradually unwound from 2025 in line with global demand growth, Moody's estimated.
At the same time, subdued oil production will weigh on the government's fiscal balance, which Moody's expects will remain in deficit at around 3 per cent to 4 per cent of GDP in 2024-2025, compared with a deficit of 2 per cent in 2023, according to the report.
"Oil prices will average $82 per barrel in 2024 and $75 per barrel in 2025," the agency estimated.
Based on Moody's fiscal projections, Saudi Arabia's government debt is likely to rise further to around 30 per cent of GDP in 2025 from 26 per cent in 2023, but the government will continue to have a strong balance sheet given sizeable financial assets, according to the report.
The positive outlook reflects the increasing likelihood that, through reforms and investment in various non-oil sectors, the sovereign's economic and fiscal reliance on hydrocarbons will, over time, materially decline, Moody's said.
Ultimately, this will not only reduce its exposure to oil price cycles and to a potential acceleration in global carbon transition, but it will also diminish the pressure to support the kingdom's implicit social contract through growth in public spending, it added.
Rating agency S&P Global in March affirmed Saudi Arabia’s sovereign rating and outlook betting on social and economic reforms to improve the country’s prospects.
The kingdom recently said it would adapt its Vision 2030 strategy to current economic and geopolitical challenges.
The kingdom would “downscale” or “accelerate” some of the projects being carried out under the programme, Finance Minister Mohammed Al Jadaan said at the special meeting of the World Economic Forum in Riyadh.
