Moody’s revises Saudi Arabia’s outlook to stable on fiscal discipline

The kingdom's fiscal deficit will narrow sharply in 2021 to less than 2.5 per cent of gross domestic product from 11.2 per cent in 2020

The Riyadh skyline. Moody's said Saud Arabia's debt burden will decline below 29 per cent of GDP at the end of this year from 32.5 per cent of GDP in 2020. Reuters

Moody’s Investors Service revised Saudi Arabia’s outlook to stable from negative and affirmed its long-term issuer and senior unsecured ratings at A1 on expectations that the government will reverse most of the increase in its debt burden while preserving its fiscal buffers.

The ratings agency also affirmed the kingdom’s A1 senior unsecured medium-term note programme ratings, it said in a statement on Saturday. An A1 rating indicates the country is well-placed to meet its debt obligations.

Moody’s affirmed the ratings due to “the government’s improving track record of fiscal policy effectiveness, evidenced by policy responses in periods of both low and high oil prices, that consistently demonstrate a commitment to fiscal consolidation and longer-term fiscal sustainability”, the credit rating agency said.

The expected fiscal improvement over the next several years will be helped by higher oil prices, although the stable outlook takes into account the expectation that oil prices will remain volatile, Moody’s said.

Economic output in the kingdom, Opec’s biggest producer and the world’s largest exporter of crude, is expected to grow by 2.4 per cent this year and by 4.8 per cent in 2022, the International Monetary Fund said in June. The growth will be buttressed by a strong rebound in the kingdom’s non-oil sector and investment from its sovereign wealth fund, the Public Investment Fund.

Oil-exporting countries will have large surpluses in 2021 and 2022 as higher crude prices lead to more revenues for many producers, the Institute of International Finance said in a report on November 4.

Saudi Arabia recorded a budget surplus – its first since 2019 – during the third quarter of this year as higher crude oil prices improved its finances, according to a report by the kingdom's Ministry of Finance. The Arab world's biggest economy posted a surplus of 6.7 billion Saudi riyals ($1.8bn) while it earned revenues of 243.3bn riyals during the period. Oil revenues soared 60 per cent annually to 147.9bn riyals, the ministry said.

Moody’s said Saudi Arabia’s fiscal deficit will narrow sharply in 2021 to less than 2.5 per cent of gross domestic product from 11.2 per cent of GDP in 2020 and will remain close to balance in the next several years.

Consequently, the kingdom’s debt burden will decline below 29 per cent of GDP at the end of this year and to around 25 per cent of GDP by 2025 from 32.5 per cent of GDP in 2020, thereby reversing most of the pandemic-induced impact on the government’s balance sheet, the ratings agency said.

Although higher oil prices will contribute significantly (about two-thirds) to the projected fiscal improvement this year, Moody’s said this improvement will be sustained in the medium term because of the government’s commitment to further fiscal consolidation over the coming years, including under the Fiscal Sustainability Programme.

“The government’s improving track record of fiscal policy effectiveness increases the likelihood that the above-mentioned debt trajectory remains broadly intact even if oil demand and prices weaken somewhat relative to Moody’s expectations,” the agency said.

“This view is supported by the government’s fiscal policy response to the oil price shock during 2020, demonstrating overall spending restraint and its decision to triple the value-added tax rate to 15 per cent, despite unfavourable economic conditions, in order to offset some of the decline in oil revenue.”

Meanwhile, the credit impact of carbon transition will be mitigated by Saudi Arabia’s adjustment capacity and its progress on economic and fiscal diversification, Moody’s said.

The kingdom’s capacity to adjust is supported by the sovereign’s high GDP per capita and the government’s ongoing economic diversification efforts aimed at increasing the size and the share of the private non-oil sector in the economy, according to Moody’s.

The ratings affirmation also takes into account the government’s moderate debt burden, which is lower than most similarly rated sovereigns, availability of robust fiscal buffers and economic strength underpinned by its highly competitive position in the oil market, the agency said.