High credit rating ‘reflects’ solid economic foundation

Ibrahim Al-Assaf.
Ibrahim Al-Assaf.

Minister of Finance Ibrahim Al-Assaf.

Saudi Arabia’s success in maintaining its high credit rating despite the economic pressures that accompanied the decline in oil prices and anxiety associated with global markets reflects the solid foundations of the Kingdom’s economy, according to Minister of Finance Ibrahim Al-Assaf.

It also reflects the Kingdom’s ability to face periodic fluctuations and the success of the economic policies adopted and implemented by the government, SPA quoted Al-Assaf as saying in the context of the announcement by global credit rating agency Moody’s fixing the sovereign rating of the Kingdom at high credit grade of Aa3 with a stable future outlook. The agency commended the strength of the banking system in the Kingdom.

Fawaz Alfawaz, a Riyadh-based economic consultant, said the decline in the price of oil is bound to affect the Saudi financial position and there is no secret in it. “However, when assessing the Saudi position it is important to note that the Saudi public debt relative to GDP is less than 10 percent compared to average OCED country where the debt to GDP is roughly 87 percent.”

Oil is not the only commodity that declined, which greatly benefits the Kingdom as a major importer of food and other commodities, Alfawaz said, adding that the Saudi reserves stand at around $660 billion and not too many countries can claim about two years budgets in reserves.The Saudi authorities have deep rooted experience as the 1980s and early 1990s when they managed the oil price decline, domestic debt, and the ability to reduce expenditures, he said. “Oil is ultimately a cyclical commodity and will recover in terms of price,” Alfawaz added.

John Sfakianakis, Middle East director at Ashmore Group, said Moody’s rating reflects a truer picture of the macro-fiscal situation than ratings by S&P. Moody’s clearly underscores several important strengths, including low government debt, external liquidity and prudent financial system regulation.

“Government debt to GDP is among the worlds’ lowest, banks are very well provisioned by 190 percent and the private sector is not highly leveraged. Saudi Arabia’s economy is far more resilient that meets the eye,” he said.

London-based James Reeve, deputy chief economist and assistant general manager at Samba Financial Group, said Moody’s report takes a more positive view. It tends to emphasize the size of fiscal buffers and the low level of domestic debt, which will help the Kingdom to deal with the challenge of low oil prices. “Thus, I don’t think Moody’s is likely to downgrade Saudi Arabia anytime soon. However, it also says that the government needs to enhance nonoil revenue — possibly by reducing subsidies on gasoline or by introducing VAT — otherwise the rating will come under pressure in the next couple of years.”

Saudi Arabian Monetary Agency (SAMA) Gov. Fahd Al-Mubarak has stressed that the Kingdom is pushing ahead with its policy to diversify sources of income and which manifested itself in the large rises in the level of government spending on infrastructure and development projects while maintaining the levels of public debt, which is still low compared with international rates.

The governor added that Moody’s fixing of the sovereign rating of the Kingdom at such a high grade confirms the success of the Kingdom’s prudent policy, which emphasizes the strengthening of reserves to strengthen the solvency of the state.

Moody’s report released on Monday said Saudi Arabia’s Aa3 foreign and local-currency government bond ratings and stable outlook are supported by its vast hydrocarbon resources, high per capita income, and strong but deteriorating fiscal position. Strong growth in oil revenues in the past several years generated very large fiscal surpluses through 2013, allowing the government to build a sizeable asset cushion and sharply reduce its debt ratios to levels much lower than rating peers. Moody’s assesses Saudi Arabia’s economic strength as ‘very high,’ supported by a track record of strong growth, high wealth levels, and large hydrocarbon reserves. Other countries who score similarly for economic strength include Germany (Aaa stable), Japan (A1 stable) and Qatar (Aa2 stable).

The strength of the government’s financial position before oil prices began their decline in mid-2014 provides a strong buffer that allows the government to easily finance its large budget deficits without seriously undermining its fiscal strength in the near term.

Saudi Arabia’s real GDP growth has averaged 5.5 percent over the last decade, supported by the country’s natural resource wealth. Since 2014, however, the country has entered a period of slower growth as a result of lower oil prices and their effect on government finance and economic activity generally.

Saudi Arabia’s proven oil and gas reserves were approximately 321 billion barrels of oil equivalent in 2014, the third largest in the world after Iran (unrated) and Venezuela. At the current rate of production, its proven hydrocarbon reserves would last approximately 65 years, lower than most regional oil producing peers but higher than GCC peers Oman (A1 negative) and Bahrain (Baa3 negative). With a nominal GDP of $ 752 billion in 2014, Saudi Arabia’s economy is 1.6 times the size of the median for Aa-rated countries.

The large surpluses enabled the government to build up very substantial financial assets while paying down its debt to a very low level.

SAMA’s foreign assets rose from $ 155 billion (47 percent of GDP) in 2005 to a peak of $ 746 billion (99 percent of GDP) in August 2014. During the same period, central government debt fell from 37 percent of GDP in 2005 (and 100 percent in the late 1990s) to 1.6 percent at the end of 2014.


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