S&P affirms Saudi Arabia's rating on asset strength and economic prospects

The kingdom's economy is expected to bounce back with 2.4% growth on average over the 2021-23 period

Kingdom Tower, Riyadh, Saudi Arabia.
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S&P Global Ratings affirmed Saudi Arabia’s 'A-/A-2' sovereign credit rating with a stable outlook thanks to the country’s strong net asset positions and its economic prospects over the next three years.

The kingdom, the biggest Arab economy, is currently facing economic headwinds like other oil-producing countries due to the twin shocks of the pandemic and lower oil prices, the rating agency said in a report released on Sunday. However, from 2021 onward, the country’s gross domestic product is expected to rebound as oil prices and the volume of its energy exports climb.

“The sovereign's sizable fiscal and external buffers should help enable [the kingdom] to weather it [the lean] period,” S&P’s primary credit analyst Ravi Bhatia said.

“The economy should begin to rebound from 2021 on, as global [economic] conditions improve.”

The stable outlook of Opec’s top oil exporter reflects continued ratings support from the kingdom’s “relatively strong government and external balance sheets”.

While Saudi Arabia’s real GDP is estimated to contract 4.5 per cent this year due to the pandemic and the related economic challenges, it is expected to grow, averaging 2.4 per cent over the 2021-23 period, the agency said.

The S&P forecast is in line with the Institute of International Finance (IIF) projections of the kingdom's economic growth of 2.3 per cent next year before contracting 5.2 per cent in 2020.

Economic indicators such as purchasing managers' index data, private sector lending, point of sale transactions and cement output, suggest "that a sizeable rebound is already under way", the IIF Middle East and North Africa's chief economist Garbis Iradian said in a report last week.

Saudi Arabia is in the midst of a major economic overhaul known as Vision 2030, which aims to cut the kingdom’s dependence on the sale of oil for revenue. Despite current headwinds, the IIF expects the recovery next year to be led by non-hydrocarbon economy, which it said would grow 3.4 per cent in 2021.

S&P said it expects the government to continue pursuing its Vision 2030 programme “in the medium term” despite current economic pressures.

The kingdom’s external metrics also remained strong despite the pandemic-driven challenges this year. Although foreign exchange reserves have declined, S&P expects them to cover an “average of 17 months of current account payments in 2020-23".

Gross foreign exchange reserves fell to $448 billion (Dh1.64 trillion) at the end of July from $499bn recorded at the end of the last year.

“We expect that Saudi Arabia's liquid external assets, net of external debt, will [still] average about 133 per cent of current account payments over 2020-23,” the ratings agency said. “Gross external financing needs will likely remain at just below 50 per cent of the sum of usable reserves and current account receipts over the same period.”

S&P expects the general government deficit will rise to 11 per cent of the country’s GDP. It is estimated to narrow to an average of 5.1 per cent of GDP from 2021-23.