Research Update:

Ratings On Saudi Arabia Affirmed At

'AA-/A-1+'; Outlook Remains Positive
Primary Credit Analyst:
Trevor Cullinan, Dubai (971) 4372-7113; trevor.cullinan@standardandpoors.com
Secondary Contact:
Christian Esters, CFA, Frankfurt (49) 69-33-999-242; christian.esters@standardandpoors.com
Analytical Group Contact:
SovereignEurope; SovereignEurope@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Related Criteria And Research
Ratings List
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Research Update:
Ratings On Saudi Arabia Affirmed At 'AA-/A-1+';
Outlook Remains Positive
Overview
In our view, Saudi Arabia's government and external balance sheets remain
strong and provide an ample buffer to withstand external shocks,
including a drop in oil prices.
We are therefore affirming our 'AA-/A-1+' sovereign credit ratings on the
Kingdom of Saudi Arabia.
The positive outlook indicates that we could upgrade Saudi Arabia in the
next year if we believe that the government has built on its achievements
in private-sector development.
Rating Action
On June 6, 2014, Standard & Poor's Ratings Services affirmed its long- and
short-term foreign and local currency sovereign credit ratings on the Kingdom
of Saudi Arabia at 'AA-/A-1+'. The outlook remains positive.
Rationale
The ratings are supported by the very strong external and fiscal positions
Saudi Arabia has built up over several years. By managing high oil revenues
prudently, the general government has retired virtually all of its debt,
generating additional fiscal space for countercyclical policies. We estimate
the general government's net asset position at close to 110% of GDP on average
during 2014-2017. Notwithstanding our assumption that the oil price will
decline to about $95 per barrel by 2017, we expect that Saudi Arabia's current
account surpluses will average a still-high 12% of GDP and external debt net
of liquid external assets will remain strong averaging about 200% of current
account receipts over the same period.
We estimate GDP per capita at $26,000 in 2014. Trend growth in real per capita
GDP, which we measure using 10-year weighted-average growth, amounted to 2%
during 2008-2017, which is in line with peers that have similar GDP per
capita.
We note that government reforms are resulting in some improvements to the
highly segmented labor market. Latest data indicate that Saudi nationals'
share of total employment increased to 24% in 2013 from 22% in 2012. We
estimate that 70% of the increase took place in the private sector, which now
accounts for around 56% of the employment of Saudi nationals. Meanwhile,
women's share of total employment increased to 9.4% in 2013 from 7.7% in the
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previous year. However, the unemployment rate remained high at 11.7% for Saudi
nationals and 0.2% for non-Saudis (overall 5.6%).
In our view, it remains to be seen whether the private sector can generate
jobs sufficiently attractive to Saudi nationals to absorb the significant
inflow into the labor market expected in the coming years. Saudi demographic
data show that about 40% of the population is younger than 20. Moreover, with
the employment of Saudi nationals mostly requiring higher labor costs than the
expat population, unit labor costs could rise and in turn weaken overall
economic competitiveness.
We view Saudi Arabia's economy as undiversified and vulnerable to a sharp and
sustained decline in the oil price. About 85% of exports and 90% of government
revenues stem directly from the hydrocarbons sector. The IMF calculated
Saudi's fiscal breakeven oil price--the oil price necessary to balance the
government's budget--at $84 in 2013. The hydrocarbon sector accounts for
slightly less than half of GDP. However, we find that the non-hydrocarbon
sector relies to a significant extent on government spending (funded by
hydrocarbon revenues) and downstream hydrocarbon activities.
We see Saudi Arabia's significant gas and oil revenues as supportive of the
current ratings. Sustained high oil prices over the past few years have helped
bolster financial buffers, maintaining government liquid assets at above 100%
of GDP and significantly offsetting the concentration risk related to the
economy's hydrocarbon dependency.
According to our estimates, based on the 2013 BP Statistical Review of World
Energy, Saudi Arabia's annual production of both oil and gas--about 5 billion
barrels of oil equivalent--could be maintained for the coming 66 years, given
320 billion barrels of oil equivalent in estimated reserves. However, in terms
of years of hydrocarbon production at current levels, Saudi Arabia is
surpassed by Qatar (114), Kuwait (92), and the United Arab Emirates (89). As a
result--alongside the high share of hydrocarbons in nominal GDP, exports, and
a relatively high fiscal breakeven oil price--we view diversification away
from the oil sector as a more pressing issue in Saudi Arabia relative to some
other GCC countries.
Saudi Arabia is an absolute monarchy in which decision-making is highly
centralized in the hands of the king and the ruling family. We find that this
makes policymaking more difficult to predict. Political institutions are still
at an early stage of development compared with those of nonregional peers in
the 'AA' ratings category and we detect little scope for direct political
participation. Establishing the Allegiance Council in 2007--to formalize the
procedure of appointing a crown prince once a new king ascends to the
throne--may help institutionalize the succession process in Saudi Arabia.
However, we believe that this new framework will face a crucial test when the
scepter is passed from a son of King Abdulaziz Al-Saud, who established the
kingdom in 1932, to the next generation of rulers. So far only the sons of
King Abdulaziz have ruled. We continue to view succession as an element of
uncertainty over the medium term.
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Research Update: Ratings On Saudi Arabia Affirmed At 'AA-/A-1+'; Outlook Remains Positive
Given the Saudi riyal's peg to the U.S. dollar, we view monetary policy
flexibility as limited. The long-standing currency peg anchors expectations
but binds Saudi Arabia's monetary policy to that of the U.S. Federal Reserve.
Furthermore, the authorities' ability to transmit their monetary policy is
affected by the underdevelopment of the domestic bond market.
Outlook
The positive outlook reflects our view that there is at least a one-in-three
chance that we could raise our ratings on Saudi Arabia in the next year. A
decisive factor will be our assessment of the government's ability to keep
building on economic diversification efforts and strengthen its private-sector
labor market for its citizens. We expect some of these measures would be
reflected in increased economic competitiveness and rising income levels
beyond our current expectations.
We could revise the outlook to stable if we anticipated that weaker economic
growth or sustained lower oil prices could lead to GDP per capita that was not
commensurate with an improved assessment of economic risk. The ratings could
also come under pressure if domestic or regional events compromised political
and economic stability.
Key Statistics
Table 1
Kingdom of Saudi Arabia - Selected Indicators
2007 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Nominal GDP (US$ bil) 416 520 429 527 670 734 745 793 810 825 841
GDP per capita (US$) 16,678 20,157 16,095 19,113 23,594 25,139 24,847 25,747 25,611 25,488 25,394
Real GDP growth (%) 6.0 8.4 1.8 7.4 8.6 5.8 4.0 4.2 4.2 4.2 4.3
Real GDP per capita growth
(%)
2.5 4.9 (1.5) 3.9 5.5 2.8 1.2 1.4 1.6 1.7 1.9
Change in general government
debt/GDP (%)
(0.4) (0.8) (0.5) (1.7) (0.4) (0.2) (0.4) (0.1) 0.0 0.0 (0.5)
General government
balance/GDP (%)
13.4 31.0 (4.2) 5.2 12.1 14.2 7.1 4.5 1.2 (0.1) (0.5)
General government
debt/GDP (%)
6.7 4.5 4.9 2.3 1.4 1.0 0.6 0.5 0.5 0.5 0.0
Net general government
debt/GDP (%)
(101.2) (108.5) (117.7) (106.6) (99.2) (108.9) (114.5) (112.2) (110.5) (107.6) (105.0)
General government interest
expenditure/revenues (%)
3.0 1.5 2.5 1.4 0.7 0.5 0.4 0.2 0.2 0.2 0.2
Oth dc claims on resident
non-govt. sector/GDP (%)
39.5 39.3 47.4 40.9 35.5 37.7 41.8 44.0 48.2 53.0 58.2
CPI growth (%) 5.0 6.1 4.1 3.8 3.7 2.9 3.5 3.0 3.2 3.4 3.4
Gross external financing
needs/CARs +use. res (%)
60.9 58.8 79.9 66.9 54.3 53.8 58.7 61.3 76.1 79.7 83.3
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Research Update: Ratings On Saudi Arabia Affirmed At 'AA-/A-1+'; Outlook Remains Positive
Table 1
Kingdom of Saudi Arabia - Selected Indicators (cont.)
Current account balance/GDP
(%)
22.4 25.5 4.9 12.7 23.7 22.4 17.8 16.6 12.5 9.7 7.1
Current account
balance/CARs (%)
35.3 38.4 9.4 23.8 40.0 38.9 32.1 30.7 23.7 19.1 14.5
Narrow net external
debt/CARs (%)
(148.7) (157.5) (238.0) (205.9) (177.2) (195.7) (207.5) (192.8) (197.1) (199.9) (202.2)
Net external liabilities/CARs
(%)
(153.7) (146.4) (215.6) (190.6) (162.6) (181.8) (192.3) (176.0) (178.0) (177.5) (176.0)
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition
of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior
year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is
defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus
public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative
number indicates net external lending. CARs--Current account receipts.
The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent
view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Related Criteria And Research
Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013
Methodology For Linking Short-Term And Long-Term Ratings For Corporate,
Insurance, And Sovereign Issuers, May 7, 2013
Criteria For Determining Transfer And Convertibility Assessments, May 18,
2009
Related Research
Standard & Poor's Revises Its Crude Oil And Natural Gas Price Assumptions,
June 3, 2014
Default Study: Sovereign Defaults And Rating Transition Data, 2013 Update,
April 18, 2014
Outlooks: The Sovereign Credit Weathervane, Year-End 2013 Update, Feb. 4,
2014
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to
make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
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Research Update: Ratings On Saudi Arabia Affirmed At 'AA-/A-1+'; Outlook Remains Positive
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook.
Ratings List
Ratings Affirmed
Saudi Arabia (Kingdom of)
Sovereign Credit Rating AA-/Positive/A-1+
Transfer & Convertibility Assessment AA
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Research Update: Ratings On Saudi Arabia Affirmed At 'AA-/A-1+'; Outlook Remains Positive
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