Fitch Ratings raises Saudi Arabia’s outlook on strong fiscal buffers

Fitch Ratings has upgraded Saudi Arabia’s sovereign debt rating to ‘A+’ from ‘A’, citing the Gulf state’s robust fiscal and external balance sheets and significant reform momentum in recent years as the country advances its economic diversification strategy.

“The upgrade of Saudi Arabia’s ratings reflects its strong fiscal and external balance sheets, with government debt/GDP and sovereign net foreign assets considerably stronger than both the ‘A’ and ‘AA’ medians and significant fiscal buffers in the form of deposits and other public sector assets,” said Fitch in a statement.

Saudi Arabia’s foreign reserves excluding gold remained broadly stable in 2022, at $459bn as financial account outflows in the form of investments and deposits abroad offset the substantial current account surplus. Fitch said the kingdom has one of the highest reserve coverage ratios among rated sovereigns at 18 months of current external payments.

#Fitch Upgrades its Credit Rating of #SaudiArabia to A+ with Stable Outlook.https://t.co/hQlVPiV27N#SPAGOV

— SPAENG (@Spa_Eng) April 5, 2023

The rating agency revised upward its estimate of the 2025 fiscal break-even oil price – the price oil needs to be at to balance the budget – to $76 a barrel from its previous forecast of $70 a barrel. It said the break-even price stood at $86 a barrel in 2022.

Oil revenues are expected to account for about 60 per cent of total budget revenue in 2023/24, despite the government’s vast investments to develop the non-oil sectors of the economy.

The upgrade by Fitch follows S&P Global Ratings, which raised Saudi Arabia’s sovereign rating to A in March citing structural reforms that are now delivering improvements to the country’s economy and fiscal and debt management.

Read: S&P Global, Moody’s raise Saudi Arabia rating on reform agenda

Moody’s also raised its outlook on the kingdom to positive, saying the structural reforms that are being implemented will reduce the country’s reliance on oil and gas revenues and its exposure to crude cycles. The rating agency reaffirmed its “A1” rating on Saudi Arabia.

Saudi Arabia’s economic growth

Meanwhile, Saudi Arabia’s GDP expanded by 8.7 per cent in 2022, the highest among G20 countries, as the kingdom’s non-oil sector and positive developments in the hydrocarbon market helped the Arab world’s biggest economy to evade the global slowdown.

Fitch cautioned that oil dependence remains a rating weakness as oil revenues are expected to account for about 60 per cent of total government income during 2023/24, although that’s down compared with 90 per cent a decade ago.

Read: Saudi Arabia’s 2022 GDP grows 8.7 per cent, boosted by higher oil prices

The International Monetary Fund urged Saudi Arabia to manage oil revenues sustainably to promote fiscal sustainability and prevent a return to previous oil-driven cycles of boom and bust.

Fitch on KSA non-oil economy

Fitch expects Saudi Arabia’s $620bn sovereign wealth fund, which is central to the Gulf state’s global ambitions under Vision 2030, to “moderate” its external investments.

The Public Investment Fund (PIF) is tasked with stimulating inward investment, accessing new technologies, developing local industries and addressing widespread underemployment in the country.

PIF investments and spending by the government in new projects are expected to accelerate real growth of 5 per cent in the non-oil private sector in 2023. However, Fitch sees non-oil growth slowing to around 4 per cent in 2024 and 2025.

The rating agency said rising public sector spending outside the budget, including ambitious giga projects under Vision 2030 and the potential for higher debt associated with state-owned s is a “medium-term risk” to Saudi Arabia’s balance sheet strengths, “particularly if this might not result in productive investments”.

PIF is funding a host of new cities in the desert under Vision 2030 including the $500bn futuristic NEOM City, the Red Sea Development Company’s mega tourism project and the Qiddiya entertainment park. The kingdom is implementing trillions of dollars worth of investments in its non-oil economy sector to drive sustainable growth post-pandemic.