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Rating Action:

Moody's changes Saudi Arabia's outlook to stable, affirms A1 ratings

 The document has been translated in other languages

05 Nov 2021

Paris, November 05, 2021 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Saudi Arabia to stable from negative and affirmed its long-term issuer and senior unsecured ratings at A1. Moody's also affirmed the Government of Saudi Arabia's (P)A1 senior unsecured medium-term note program ratings.

The change of outlook to stable reflects increased likelihood that, in the next several years, the government will reverse most of the 2020 increase in its debt burden while also preserving its fiscal buffers. This view is based on Moody's assessment of 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 expected fiscal improvement over the next several years will be facilitated by higher oil prices, although the stable outlook also takes into account the expectation that oil prices will remain volatile.

The affirmation of the A1 ratings reflects Moody's view that Saudi Arabia's structural vulnerability, due to its economic and fiscal reliance on the hydrocarbon sector, will remain a constraint on the rating for the foreseeable future. Over the next decades, Moody's expects oil exports to produce less robust revenues at peak oil prices and weaker revenues at trough oil prices compared to historical experience because global initiatives to limit the adverse impacts of climate change will increasingly constrain the use of hydrocarbons and accelerate the shift to less environmentally damaging energy sources. For Saudi Arabia, the credit impact of carbon transition is mitigated by the sovereign's demonstrable adjustment capacity and its progress on economic and fiscal diversification. The affirmation also takes into account the government's moderate debt burden, lower than most similarly rated sovereigns, availability of robust fiscal buffers, and economic strength underpinned by its highly competitive position in the oil market.

Today's rating action also applies to the A1 backed senior unsecured ratings of KSA Sukuk Limited, and its (P)A1 backed senior unsecured medium-term note program rating. KSA Sukuk Limited, a special purpose vehicle incorporated in the Cayman Islands, is wholly owned by the Government of Saudi Arabia and its debt issuances are, in Moody's view, ultimately the obligation of the Government of Saudi Arabia. Moody's has also affirmed Saudi Arabia's Aaa.sa senior unsecured and senior unsecured MTN ratings on the national scale.

Saudi Arabia's local currency (LC) and foreign currency (FC) country ceilings remain unchanged. The LC country ceiling at Aa2, two notches above the sovereign issuer rating, incorporates heavy reliance on a single revenue source for the government and non-government issuers and geopolitical risk, partly mitigated by relatively predictable institutions and balance of payments stability. The FC country ceiling at Aa2, in line with the LC ceiling, reflects very low transfer and convertibility risks, given the central bank's very large foreign currency buffers.

RATINGS RATIONALE

RATIONALE FOR THE CHANGE OF OUTLOOK TO STABLE FROM NEGATIVE

COMMITMENT TO FISCAL DISCIPLINE WILL SUPPORT IMPROVEMENT IN DEBT METRICS

Moody's expects Saudi Arabia's fiscal deficit to narrow sharply in 2021 to less than 2.5% of GDP from 11.2% of GDP in 2020 and to remain close to balance in the next several years. Consequently, the government's debt burden will decline below 29% of GDP at the end of this year and further to around 25% of GDP by 2025 from 32.5% of GDP in 2020, reversing most of the pandemic-related erosion of the government's balance sheet.

Although higher oil prices will contribute significantly (about two-thirds) to the projected fiscal improvement this year, Moody's expects that 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 newly announced Fiscal Sustainability Program (FSP). The FSP builds on the Fiscal Balance Program measures and reform initiatives implemented during the past five years, which increased non-oil revenue to more than 18% of non-oil GDP in 2020 from less than 10% in 2015 and reduced non-interest expenditure to 53% of non-oil GDP from 56% in 2015. The FSP aims to further enhance fiscal discipline, improve effectiveness of public finance management, support the rebuilding of fiscal buffers by adopting fiscal rules and by transitioning to a multi-year budgeting process, which will also better align the forward-looking fiscal framework with national expenditure priorities.

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. 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%, despite unfavorable economic conditions, in order to offset some of the decline in oil revenue. During 2020, the government accommodated most of the exceptional pandemic-related spending by cutting other lower-priority expenditures.

Moody's expects that some of the 2020 spending cuts will be permanent, facilitating further reductions in overall spending during 2021-23 as the pandemic-related fiscal support is gradually withdrawn. Moody's expects that overall spending will likely decline by around 6% this year, whereas the draft 2022 budget targets another 6% reduction (equivalent to around 2% of GDP) next year, despite higher oil prices, which in the past often led to increases in expenditure.

RATIONALE FOR AFFIRMING THE A1 RATINGS

CAPACITY TO ADJUST AND DIVERSIFICATION PROSPECTS MITIGATE STRUCTURAL VULNERABILITIES DUE TO RELIANCE ON HYDROCARBON SECTOR

Heavy, albeit gradually declining, economic and fiscal reliance on the hydrocarbon sector will remain an important feature of Saudi Arabia's credit profile for many years to come, constraining the sovereign's ratings. In Moody's near- to medium-term baseline scenario, which assumes that oil prices average close to the upper end of the agency's $50-70/barrel medium-term forecast range over the next several years, the contribution of the oil and gas sector to overall GDP will remain around 30% and the contribution of hydrocarbon revenue to total government revenue will remain above 50%, exposing the sovereign to declines in oil demand and prices and, longer term, to credit risks stemming from global carbon transition.

In the near term, higher revenues from oil exports will strengthen the government's financial profile, providing more flexibility to adjust to shocks and to the long-term negative credit impacts from carbon transition. However, over the coming decades, Saudi Arabia's adjustment capacity may be tested by a potential acceleration in carbon transition compared to currently announced policies, which would bring forward a decline in global oil demand and prices.

At this stage, Moody's assesses that Saudi Arabia has significant institutional and financial capacity to adjust to carbon transition proceeding at a moderate pace. Saudi Arabia's debt burden remaining around 25-30% of GDP over the next few years compares to Moody's projections of 35-40% for the median of Aa-rated sovereigns and around 50% for A-rated peers. Fiscal buffers, in the form of deposits with the central bank, were around 17% of GDP in 2020, covering half of the government's outstanding debt.

The capacity to adjust is further supported by the sovereign's high GDP per capita and the ongoing economic diversification efforts by the government aimed at increasing the size and the share of the private non-oil sector in the economy. The government's giga projects supported by large capital deployments from the Public Investment Fund, targeted at around 4-5% of GDP per annum in the next few years, and reforms in particular of education will support economic diversification. Over the longer term, Moody's expect these efforts to reduce Saudi Arabia's economic exposure to oil market fluctuations while also generating job opportunities for the citizens, which will relieve the government from spending increases to support public sector employment growth in order to preserve social stability.

Saudi Arabia's adjustment capacity and resilience to the risks stemming from carbon transition are also supported by its highly competitive position in the oil market, reflected in one of the lowest extraction costs globally, which will support economic resiliency even in a low oil price environment, large spare production capacity, very large hydrocarbon reserves, and its leadership of the Organization of Petroleum Exporting Countries.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Saudi Arabia's highly negative exposure to environmental risks, reflected in its E-4 issuer profile score, mainly relates to carbon transition due to its economic and fiscal dependence on the hydrocarbon sector, which is however partly mitigated by very low hydrocarbon production costs. Saudi Arabia is also one of the world's most arid states and rapid economic and population growth in recent decades have increased challenges surrounding water sustainability. While most of Saudi Arabia's water is produced by energy intensive desalination plants, which are also vulnerable to attacks and oil spills, the country has access to cheap energy that mitigates some of this risk.

Exposure to social risks is moderately negative (S-3 issuer profile score). The main source of pressure arises from the elevated unemployment rate, especially among the youth. Robust population dynamics will continue to drive rapid growth in the labor force over the coming decades creating pressure to generate job opportunities for the citizens. The effectiveness of labor market nationalization policies in reducing the elevated unemployment rate among citizens will remain the key policy challenge and an important driver of social risks in the foreseeable future. That said, a large share of expatriates in the overall labor force partly mitigates these risks.

Saudi Arabia's relatively strong institutions and governance strength supports its neutral to low G-2 issuer profile score. Moody's assessment of Saudi Arabia's institutions and governance strength reflects strong monetary and macroeconomic policy effectiveness, improving fiscal policy effectiveness as mentioned above.

Saudi Arabia's ESG Credit Impact Score is moderately negative (CIS-3), reflecting highly negative exposure to environmental risks and moderately high social risks, which are partly contained by institutions and governance strength and economic resilience, including the availability of financial resources in the form of sovereign wealth fund assets that can be used to absorb shocks. Its ESG attributes are overall considered as having limited impact on the current rating, with greater potential for future negative impact over time, especially if carbon transition accelerates compared to currently stated policies globally.

GDP per capita (PPP basis, US$): 46,489 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -4.1% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.4% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -11.2% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -3.1% (2020 Actual) (also known as External Balance)

External debt/GDP: 34.0% (2020 Actual)

Economic resiliency: a2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 01 November 2021, a rating committee was called to discuss the rating of the Saudi Arabia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade would be supported by increasing evidence that structural reforms aimed at reducing the reliance of Saudi Arabia's economy and public finances on oil revenues will likely be more effective than in Moody's baseline scenario, strengthening the sovereign's economic and fiscal resilience to shocks and positioning it more favorably to address future carbon transition challenges. Such improvements would likely be reflected in a declining government debt burden, independent of oil price cycles, increasing fiscal buffers and evidence of significant and steady progress in diversifying the economy and fiscal revenue streams.

The conclusion that the government's reform efforts will fall substantially short of its economic and fiscal objectives, with the debt burden continuing to rise and leaving Saudi Arabia persistently and significantly exposed to further oil market shocks and rising social pressures, would exert downward pressure on the ratings. A significant escalation of regional geopolitical risks that would threaten Saudi Arabia's oil production and export capacity would also likely lead Moody's to downgrade the ratings. Evidence that global carbon transition is accelerating markedly, with oil demand and prices at risk of falling substantially faster, would also exert negative pressure on the ratings, unless Saudi Arabia was able to adjust its economic and revenue bases equally rapidly.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1280297.

The local market analyst for Saudi Arabia, Government of's ratings is Alexander Perjessy, +971 (423) 795-48.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lucie Villa
VP - Senior Credit Officer
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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