Fitch Ratings has today revised its outlook on Saudi Arabia from stable to positive, amid high oil prices on international markets, stemming from the Ukraine war. The sovereign credit rating remains at A.
The credit ratings agency pointed to improvements in the government’s financial position as a result of rising oil revenue and an ongoing program of fiscal reforms as the reason for the upward revision.
Fitch said it now expects the government to record a budget surplus in 2022 and 2023 – the first time it has done so since 2013. For that to happen, though, the government will need to resist the urge to boost spending, something it has failed to do in the past when prices have spike upwards.
This time it may be different. Fitch said it expects Saudi government spending this year to remain unchanged from last year and for spending to edge downwards in 2023. One reason the government might be able to keep spending under control is that off-budget spending by state-owned bodies such as Saudi Aramco, the Public Investment Fund (PIF) and the National Development Fund (NDF) remains buoyant.
However, Fitch offered a note of caution on this, saying “Rising public-sector spending outside the budget and the potential for higher debt of state-owned and government-related entities … is a medium-term risk to the sovereign’s balance-sheet strengths.”
The government’s own debt position looks healthy. Fitch expects the sovereign debt-to-GDP ratio to remain below 30% until 2025 (most other A-rated sovereigns have a debt ratio twice as high). The government will also retain a substantial buffer, with deposits at the central bank worth more than 10% of GDP.
Diversification progress
Fitch’s calculations are based on an average oil price of $100 a barrel this year and $80 a barrel next year, with Saudi oil output of 10.7 million barrels a day (b/d) in 2022 and 11.1 million b/d in 2023. Highlighting the central role of oil in the Saudi economy, Fitch said that every $10 change in the price of a barrel of oil would change its budget deficit forecast by 2.3% of GDP.
The push to diversify the Saudi economy has though shown some progress. Oil revenue will account for more than 60% of total budget revenue in 2022-2023, but that is down from 90% a decade ago. Non-oil revenue is now averaging around 19% of non-oil GDP, more than twice the level it was at in 2015 – helped by the introduction of a 5% value-added tax (VAT) rate on goods and services in January 2018, which was tripled to 15% in July 2020.
However, Fitch notes that the performance of the non-oil sector is still, in part at least, dependent on oil-funded investment. As the change to the ratings outlook shows, the Saudi economy remains wedded to oil for the time being.
