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:

•  
  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.
  
• 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:

•  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.
  
• 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.
  
• 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