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Publication Date:
30-Jul-2003
Reprinted from Ratings Direct
Research
Saudi Arabia (Kingdom of)
Analyst: Ala 'a AI-Yousuf; D.Phil. , London (44) 20-7847-7104; David T
Beers, London (44) 20-7847-7101
Rating History
'A+/A-I' local currency and 'A/A-1' foreign currency ratings assigned;
outlook stable July 14, 2003
Default History Since 1975
None
Year
2003
Population
23.4 million
Per Capita GDP
$8,076
Rationale
The ratings on the Kingdom of Saudi Arabia are supported by:
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Macroeconomic stability. Despite several external shocks, the Kingdom
has maintained stability In its highly open economy-in particular, a
stable exchange rate, low Inflation, and a sound banking system.
Ambitious reforms to liberalize the economy further, strengthen its
institutional capacity, and prepare for accession to the World Trade
Organization (WTO) are well under way and should contribute to further
economic resilience. The Saudi Arabian Monetary Authority (SAMA) has
earned a good reputation as a banking supervisor, with standards in
line with International best practice.
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Substantial external liquidity. The government has built a substantial
cushion of foreign assets. At year-end 2002, foreign exchange reserves
held by SAMA stood at about $42 billion, equivalent to 10 months of
current account payments or 4x short-term debt. Standard & Poor's
expects this comfortable external assets cushion to be maintained.
Saudi Arabia's other external liquidity indicators also compare
favorably with those of its peers. The government has no external
debt, nor plans to incur any, and the non-financial public sector has
low external debt equivalent to 17% of current account receipts.
-
The governments sizable domestic Investments and favorable debt
profile. The Public Investment Fund (PIF) has a sizable portfolio of
holdings In about 24 domestic listed companies. A process of
divestment started In December 2002 with the sale of a 30% stake in
the Saudi Telecom Company, which raised about $4 billion. Central
government debt currently stands at about 95% of GDP, but more than
80% of It is medium- and long-term and held by the pension funds, the
PIF, and other government institutions. Consequently, on a
consolidated basis, general government debt is relatively low, at
about 20% of GDP at year-end 2002. Taking into account a conservative
estimate of the government's listed and unlisted equity investments
domestically and abroad, Standard & Poor's estimates that the
government is currently a net creditor at a level equivalent to about
54% of GDP, and expects this position to remain broadly unchanged up
to 2005.
The higher long-term local currency credit rating on Saudi Arabia
balances the government's ability to raise revenues and access the
domestic capital markets against geopolitical risks that could impair
its ability to service both local and foreign currency debt.
The ratings on the Kingdom are constrained by:
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Limited fiscal flexibility. Oil revenues, which account for about 80%
of total revenues, are largely capped by the Kingdom's quota in OPEC's
production, which is unlikely to increase significantly in the medium
term. Although oil revenues will remain volatile, conservative
budgeting practices are expected to continue to reduce downside risks
and prevent large budget deficits. Budgetary expenditure control could
be strengthened further to prevent overruns, but the room for
sequestration In times of stress will remain limited by the high share
of wages (slightly less than 50%) unless further privatizations reduce
the size of the government’s payroll. Despite higher-than-expected oil
revenues, the budget is estimated to have recorded a deficit of about
3% of GDP in 2002. In 2003, this is projected to fall to 1.0%, before
rising to 3.7% in 2004 and 6.3% in 2005, largely reflecting an assumed
decline in oil prices. Extra-budgetary expenditure programs reduce the
comprehensiveness and transparency of the budget, but they are
quantified and expected eventually to be incorporated into it.
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Insufficient private sector economic growth. Over the next few years,
growth in the non-oil private sector is expected to average 5%. This
is higher than the expected indigenous population growth rate of 3.5%,
but in line with the expected Saudi labor force growth rate. The
authorities have made job creation for Saudi youth their top priority
and aim to achieve this through gradual labor substitution and the
acceleration of private sector growth. The government's strategy rests
on continued macro-economic stability, ambitious and broad-based
economic reforms, enhancing education and training, and attracting
foreign direct Investment (FDI), especially into its Natural Gas
Initiative (NGI). The latter, however, is being renegotiated and, even
if it is finalized soon, will have a five-year gestation period.
Similarly, structural reforms will also take time to become effective,
and Saudi youth unemployment may rise in the meantime.
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A slowly developing sociopolitical system. Policy-making is slowed by
the need to preserve consensus among diverse stakeholders, although,
in theory, the Kingdom is an absolute monarchy. This approach has
maintained political stability during difficult times, but
policy-making has been slow and timid in the face of adverse
short-term economic shocks and long-term demographic challenges. The
political system is developing, however, with plans to hold direct
elections to provincial councils first, and then the national Shura
Council, which could potentially expedite decision-making.
Outlook
The stable outlook balances the prospects for the success of the
government's ambitious and broad-based reform effort against the
significant challenges posed by a rapidly- growing population and the
building of political and economic Institutions. The governments
creditworthiness could improve over the medium term. If the NGI Is
launched soon and achieves most of its goals, non-oil private sector
economic growth accelerates, the government’s non-oil revenue base
expands, and the socio-economic pressures surrounding youth unemployment
decline. Conversely, the governments creditworthiness could come under
downward pressure If its debt burden increases significantly, external
liquidity is impaired, or domestic and regional political risks
increase.
Ratings List
Kingdom of
Saudi Arabia
·
Foreign currency sovereign credit rating
A/Stable/A-l
·
Local currency sovereign credit rating
A+/Stable/A-l
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