Saudi Arabia warned by ratings agency S&P of possible consequences of older population

Without reforms, government spending to support elderly could lead to downgrades.

The elderly population in Saudi Arabia is likely to balloon to 15 per cent of the country by 2050 compared to 3 per cent now, which could lead to a rating downgrade. Above, a trader in Riyadh. Bilal Qabalan / AFPShow less

As Saudi Arabia prepares to issue an international bond sale this year, its credit rating may come under pressure in the future from its ageing population.

The kingdom’s ageing population could put a strain on public finances, exacerbate debt levels and lead to a credit rating downgrade if reforms are not introduced over the next 30 years, the ratings agency Standard and Poor’s (S&P) said.

Any Saudi rating downgrade will probably put pressure on the country to pay more interest than some of it Gulf peers for its sovereign bonds. Under the National Transformation Plan for 2020 revealed in April, the Saudi government plans to increase the debt-to-GDP ratio to 30 per cent from 7.7 per cent now to finance the fiscal deficit.

Saudi foreign bond sales tend to be few and far in between, with most issuances coming from state-linked entities such as Saudi Electricity Company. SEC’s thinly traded sukuk maturing in 2044 had a yield of 5.7 per cent yesterday.

Age-related government expenditure on pensions and health care could surge to 14 per cent of GDP by 2050 from 6 per cent now, leading to a ballooning of the net debt-to-GDP ratio to 340 per cent of GDP by 2050 if the government fails to amend its policies, the credit ratings agency said in a report.

The increase in Saudi age-related expenditure is higher than the projected 3.7-percentage-point increase for the median of 58 sovereigns that S&P has analysed. The high debt level of 340 per cent of GDP would make Saudi Arabia one of six sovereigns with net debt levels exceeding 250 per cent by 2050, S&P said.

“Saudi Arabia’s growing elderly population could put pressure on public finances and government debt over the next three decades in the absence of ­government reforms to contain the cost of age-related spending, according to our analysis,” S&P said.

The ratings agency is forecasting that the Saudi Arabian population will expand to 46 million by 2050 from 32 million last year, with the percentage of elderly people edging up to 15 per cent of total citizens from 3 per cent now.

“Under our hypothetical no-policy-change scenario, our current A- rating on Saudi Arabia would likely come under increasing pressure over the next 30 years,” S&P said.

“By 2045, we expect that Saudi Arabia’s fiscal indicators will have weakened such that they would be more in line with sovereigns currently rated in the speculative-grade category, because, in our view, the projected improvement in GDP per capita would not be able to offset the potential fiscal deterioration.”

S&P kept Saudi Arabia’s main credit rating on hold at A- in April after two downgrades in the prior six months following a collapse of oil revenue and dwindling foreign currency reserves. S&P cut the country’s rating to A+ in October, subsequently cutting it again to A- this February and leaving the country’s rating four levels above non-investment-grade territory.

The big chunk of age-related spending will be channelled to pension outlays, which are forecast to rise to 9 per cent of GDP in 2050 from the current 3 per cent of GDP.

“An additional factor that could affect our current projections for Saudi Arabia is the cost of long-term care – which is likely to increase as the economy grows,” the agency said.

Nevertheless, S&P expects the government to undertake demographic reforms to contain the public debt and narrow the fiscal deficit.

“Owing to growth in the young population, subscribers to Saudi Arabia’s generous pension system have been outstripping growth in the number of beneficiaries, contributing to the overall financial health of the system,” S&P said. “Over time, we believe Saudi Arabian governments will likely consider demographic reforms to the system to ensure its sustainability.”