Fitch Ratings has affirmed Saudi Arabia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A' with a Stable Outlook, reflecting the kingdom’s strong fiscal and external balance sheets, including exceptionally high international reserves and low government debt.

“However, these are tempered by oil dependence, weak World Bank governance indicators and vulnerability to geopolitical shocks. The kingdom's fiscal and external balance sheets have been weakening, and the recent sharp downturn in oil prices has accelerated this trend,” the ratings agency said in a report issued Thursday.

Fitch outlook:

  • The government budget deficit will spike about 12 percent of GDP in 2020 (roughly $80 billion), from 4.5 percent of GDP in 2019.
  • Oil revenue will be down 41 percent assuming an average oil price of $35 per barrel and average production of 11.5 million barrels/day (mmbbl/d; or 12mmbbl/d from April onwards).
  • Non-oil revenue to be down 15 percent as a result of the coronavirus pandemic. The sharp declines this year are partly due to large non-recurring revenue items last year, including a special Saudi Arabian Oil Company (Saudi Aramco) dividend, proceeds from the anti-corruption campaign and tax settlements.

Budget deficit

Fitch Ratings said the Saudi finance ministry has expressed strong commitment to a deficit of 9 percent of GDP in 2020, although the revenue assumptions underlying this are unclear.

“Under our oil revenue assumptions, it appears that this would only be possible with additional non-recurring revenue. The government could request extraordinary distributions from the Saudi Arabian Monetary Authority (SAMA) over and above the regular dividends that SAMA pays into the government budget or drawdowns of government reserves (government deposits at SAMA, which are separate from SAMA reserves).”

The ministry has signalled a sharp turn towards austerity this year, although it will face a difficult balancing act with the non-oil economy likely to enter deep recession, said the report.

It has announced a 5 percent cut to spending for 2020, on top of the 3 percent cut envisaged in the 2020 budget. Further fiscal measures are under consideration.

“We expect spending cuts to offset the fiscal effect of the government's SAR70 billion (nearly 3 percent of GDP) economic support package, which mostly goes towards deferring and cancelling fees and taxes. Spending fell 2 percent in 2019, partly reflecting a spike in cash outlays in 2018 due to the accelerated payment of arrears.”

Oil price recovery

While recovery in oil prices to $45/bbl, an easing of the coronavirus pandemic and restrained spending growth could bring the deficit down to about 7 percent of GDP in 2021, there are large uncertainties around this forecast, Fitch warned.

Saudi Arabia's announced oil production levels may prove to be incompatible with the agency’s oil price assumptions, and the Kingdom could engage with a renewed global effort to limit excess oil supply.

“We estimate that a 1mmbbl/d decrease in average production would increase the fiscal deficit by about 2 percent of GDP. A $10/bbl change in the average oil price would affect the deficit by more than 4 percent of GDP. At this point, the impact would be less in 2020 as part of the year's production has already been priced and sold. We estimate that Saudi Arabia's fiscal break-even price of oil will average around $70/bbl in 2019-2021.”

The government and broader public sector balance will deteriorate, notwithstanding fiscal consolidation and increase in oil prices. Fitch forecasts debt at about 36 percent of GDP in 2021, from 23 percent of GDP in 2019, as the government resorts to financing deficits primarily through debt.

Debt issuance will be complemented by drawdowns from the government reserve account with Fitch expecting reserve to fall to 12 percent of GDP by 2021, from 18 percent of GDP in 2019.

The kingdom will post a current account deficit of 4 percent of GDP in 2020 and a surplus of 1 percent of GDP in 2021, from a surplus of about 6 percent of GDP in 2019, according to the report.

Non-oil economy

The non-oil economy will be in recession this year, reflecting sweeping disruptions to activity related to the coronavirus and the net tightening of fiscal policy, the report said. SAMA is undertaking its own SAR50 billion stimulus package, providing some cushion for the economy. Overall, GDP growth will pick up strongly on the back of higher oil production.

Most structural features are weaker than the 'A' category median, including World Bank indicators of governance and competitiveness. Unemployment rate remains relatively high at 12 percent in 3Q19, despite recent declines, creating economic and social pressure, the agency estimated.

(Writing by Brinda Darasha, editing by Seban Scaria)

seban.scaria@refinitiv.com

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