Fitch Ratings lowers outlook for Saudi Arabia to ‘negative’ from ‘stable’

Fitch has lowered its outlook for Saudi Arabia to “negative” from “stable” on the back of lower oil prices and increased spending on infrastructure projects.

While the ratings agency affirmed its AA rating for the kingdom, it forecasts Saudi Arabia’s general government deficit to widen to 14.4 per cent of gross domestic product this year.

It added that deficits in the mid-single digits are forecast for next year and 2017 but it would stay in double digits if there was no fiscal consolidation.

“The policy response has been limited and primarily consists of a reduction in capital spending that will take time to gain traction,” Fitch said in a report. “Transparency on fiscal policy and out-turns is a weakness relative to rating peers.”

Fitch expects Saudi Arabia’s deficit financing to continue this year. The Saudi government in July held its first bond auction since 2007. The country this month also issued approximately US$5 billion of bonds, with another $27bn expected before the year’s end, as the world’s largest oil exporter hopes to avoid further drawing down on its reserves.

“Deficit financing and the drawing down of deposits ring-fenced for specific projects is forecast to reduce the government’s net creditor position to 36.4 per cent of gross domestic product at end-2017 from 54.2 per cent at end-2014,” it said.

The collapse of the Brent crude price from about $110 per barrel in June last year to about $45 per barrel on Friday has dramatically reduced oil revenues accruing to the kingdom, even as the government ploughs ahead with infrastructure mega-projects designed to help the country reduce its dependence on hydrocarbons.

Projects include the development of metro and rail networks, housing programmes and power, energy and water infrastructure.

Saudi Arabia’s economy is largely dependent on oil. It accounts for 90 per cent of fiscal revenues, 80 per cent of current account revenues and 40 per cent of the gross domestic product.

Saudi’s non-oil growth was sluggish in the first quarter of 2015 at 3.3 per cent, versus 7.2 per cent on average in the five years to 2014, said Fitch.

The agency expects consumer spending and new major industrial projects to underpin non-oil growth of about 4 per cent this year.

Yet, a government cut in public spending will be a “test of the resilience” of the kingdom’s private sector.

Fitch lauded Saudi Arabia’s efforts to tackle unemployment rates and a shortage in affordable housing.

Employment in the private sector rose, with Saudi nationals forming 15.3 per cent of the sector’s employees at the end of last year – the highest rate in the past decade, according to Fitch.

Meanwhile, the country’s banking sector ranks the highest in the GCC, said Fitch. The kingdom’s “A” rating on the banking system risk indicator makes it only below “AAA” rated countries such as Australia, Canada and Singapore. Last week, the IMF cut its economic growth forecasts for Saudi Arabia.

The fund now expects the Saudi economy to grow at a rate of 2.8 per cent this year, down 0.2 percentage points from its previous estimate. The IMF predicts it will grow at a rate of 2.4 per cent next year – again, slower than the fund’s previous estimate of 2.7 per cent.

Follow The National's Business section on Twitter